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Item 7. Management’s Discussion and Analysis

2022-02-15 compared with 2021-02-24 · 84 added, 159 removed, 217 unchanged (53% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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.

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated 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 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.

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This section generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020.

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.

Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 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, 2020 filed with the SEC on February 24, 2021.

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.

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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 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.

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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.

Leveraging our collaboration with Microsoft, we are creating the TCR-Antigen Map.

We are using this map to develop research solutions by disease called immunoSEQ T-MAP and a diagnostic product for many diseases from a single blood test called T-Detect.

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

We expect to launch a second indication, T-Detect Lyme, during the 2022 Lyme season.

In addition, we have confirmed signals in Crohn’s disease, celiac disease, and multiple sclerosis, as well as identified new signals in ulcerative colitis and rheumatoid arthritis.

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.

We also 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.

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 nonrefundable upfront or recurring payments.

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

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

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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.

In the future, we intend to sell other diagnostic 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.

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

We have an experienced, specialty salesforce that is targeting department heads, laboratory directors, principal investigators, core facility directors, clinicians, payors and research scientists and pathologists at leading academic institutions, biopharmaceutical companies, research institutions and contract research organizations.

We have an experienced, specialty salesforce that is targeting department heads, laboratory directors, principal investigators, core facility directors, clinicians, payors, research scientists and pathologists at leading academic institutions, biopharmaceutical companies, research institutions and contract research organizations.

As MRD assessment becomes standard practice for patient management across a range of blood cancers, we believe it will be essential for clinicians and patients to have access to a highly accurate, sensitive and standardized MRD assessment tool.

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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 recognized revenue of $154.3 million and $98.4 million for the year ended December 31, 2021 and 2020, respectively.

Net loss attributable to Adaptive Biotechnologies Corporation was $207.3 million and $146.2 million for the year ended December 31, 2021 and 2020, 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.

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Sequencing 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.

Sequencing revenue reflects the amounts generated from providing testing services through clonoSEQ to clinical and research customers, from providing our T-Detect COVID test to clinical customers and from providing sequencing services through immunoSEQ to research customers.

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

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.

We recognize clinical revenue by evaluating customer payment history, contracted reimbursement rates, if applicable, and other adjustments to estimate the amount of revenue that is collectible.

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

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

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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.

Any unrecognized revenue from the initial billable test is recorded as deferred revenue and recognized either as we deliver our estimate of the remaining tests in a patient’s treatment cycle or when the likelihood becomes remote that a patient will receive additional testing.

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.

For all research 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.

In periods where our sample estimates are reduced or a customer project is cancelled and, in either case, we have remaining related deferred revenue, we recognize revenue using a cumulative catch-up approach based on the proportion of samples delivered to date relative to the remaining samples expected to be delivered.

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.

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

We enter into collaboration and similar agreements with these customers.

When these agreements include sequencing activities, we separately classify those activities as sequencing revenue.

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

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

When the agreements include sequencing activities, we separately classify those activities as sequencing revenue.

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

During the year ended December 31, 2021, we executed an intellectual property license agreement that includes variable consideration related to sales-based royalties.

Any consideration related to such royalties will be recognized as development revenue at the later of when (i) the related sales occur or (ii) the performance obligation to which some or all of the sales-based royalty has been allocated has been satisfied (or partially satisfied).

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.

Due to the ongoing uncertainties related to the COVID-19 pandemic, we may 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 by the pandemic.

Cost of Revenue

Cost of revenue includes the cost of materials, personnel-related expenses (comprised of salaries, benefits and share-based compensation), shipping and handling, equipment and allocated facility costs associated with processing samples and professional support for our sequencing revenue.

Allocated facility costs include depreciation of laboratory equipment, allocated facility occupancy and information technology costs.

Cost of revenue includes the cost of materials, personnel-related expenses (including salaries, benefits and share-based compensation), shipping and handling expenses, equipment costs and allocated facility costs associated with processing samples and professional support for our sequencing revenue activities.

Allocated facility costs include depreciation of laboratory equipment, as well as allocated facility occupancy and information technology costs.

Costs associated with processing samples are recorded as expense, regardless of the timing of revenue recognition.

As such, cost of revenue and related volume does not always trend in the same direction as revenue recognition and related volume.

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

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

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.

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We do not track research and development expenses by specific product candidates.

A component of our research and development activities is supporting clinical and analytical validations to obtain regulatory approval for future clinical products and services.

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

A component of our research and development expenses are costs supporting clinical and analytical validations to obtain regulatory approval for future clinical products and services.

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

Some of these activities have generated and may in the future generate development revenue.

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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

Sales and marketing expenses consist primarily of personnel-related expenses for commercial sales, account management, marketing, reimbursement, medical education and business development personnel that support commercialization of our platform products.

Sales and marketing expenses consist primarily of personnel-related expenses for commercial sales, product and account management, marketing, reimbursement, medical education and business development personnel that support commercialization of our platform products.

In addition, these expenses include external costs, such as advertising expenses, customer education and promotional expenses, market analysis expenses, conference fees, travel expenses and allocated facility costs.

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General and Administrative Expenses

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.

General and administrative expenses consist primarily of personnel-related expenses (including salaries, benefits and share-based compensation) 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 facility costs.

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Interest and other income, net

Net loss attributable to noncontrolling interest

Net loss attributable to Adaptive Biotechnologies Corporation

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

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

to common shareholders, basic and diluted

Net loss attributable to Adaptive Biotechnologies Corporation common shareholders

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

Weighted-average shares used in computing net loss per share attributable to Adaptive Biotechnologies Corporation 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

(1) Adjusted EBITDA is a non-GAAP financial measure that we define as net loss attributable to Adaptive Biotechnologies Corporation 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 attributable to Adaptive Biotechnologies Corporation, the most directly comparable GAAP financial measure, and a discussion about the limitations of Adjusted EBITDA.

Comparison of the Years Ended December 31, 2021 and 2020

Year Ended December 31,

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Total revenue

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 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 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.

The $37.5 million increase in sequencing revenue was primarily attributable to a $24.3 million increase in revenue generated from biopharmaceutical and academic customers, inclusive of a $2.9 million increase due to changes in estimates of total samples to be provided under certain of our MRD development agreements.

Additionally, there was a $13.2 million increase in revenue generated from clinical customers, inclusive of a $1.9 million increase related to Medicare reimbursements resulting from our determination that the likelihood of additional testing for specific patients was remote and a change in our estimate of expected cumulative tests per patient for one of our covered indications.

Research sequencing volume increased by 42% to 32,146 sequences delivered in the year ended December 31, 2021 from 22,663 sequences delivered in the year ended December 3 1 , 2020.

Clinical sequencing volume, excluding T-Detect COVID volume, increased by 48% to 22,516 clinical tests delivered in the year ended December 3 1 , 2021 from 15,186 clinical tests delivered in the year ended December 31, 2020.

The $18.5 million increase in development revenue was primarily attributable to a $9.2 million increase in revenue generated from the Genentech Agreement and an $8.4 million increase in revenue recognized from MRD development agreements, inclusive of a $7.5 million increase in revenue recognized upon the achievement of certain regulatory milestones by us and our customers' therapeutics.

Cost of Revenue

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Cost of revenue

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.

The $26.8 million increase in cost of revenue was primarily attributable to a $13.5 million increase in labor, overhead and facility costs and a $9.7 million increase in materials costs resulting from increased revenue sample volume.

Additionally, there was a $1.6 million increase in sample collection costs and a $1.5 million increase in shipping costs.

These increases were partially offset by a $0.9 million decrease related to higher usage of our production laboratory to process research and development samples versus revenue samples.

Research and Development

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(in thousands)

Research and development materials and allocated

production laboratory expenses

Research and development materials and allocated production laboratory expenses

Personnel expenses

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Depreciation and other expenses

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.

The $26.3 million increase in research and development expenses was primarily attributable to a $17.9 million increase in personnel costs and a $6.4 million increase in depreciation and other expenses, which included a $2.3 million increase in consultant costs.

Sales and Marketing

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Sales and marketing

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.

The $34.1 million increase in sales and marketing expenses was primarily attributable to $23.7 million in additional personnel costs, $6.0 million in additional marketing expenses, a $2.2 million increase in travel and customer event related expenses and a $1.2 million increase in consultant costs.

Our clonoSEQ and T-Detect marketing efforts were the largest drivers of the $6.0 million increase in marketing expenses.

General and Administrative

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General and administrative

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 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.

The $25.0 million increase in general and administrative expenses was primarily attributable to a $13.3 million increase in personnel costs, as well as a $7.8 million increase in building, facility and depreciation related expenses.

Additionally, there was a $2.3 million increase in consultant costs and a $2.2 million increase in computer and software expenses, which were partially offset by a $2.1 million decrease in legal, accounting and tax fees.

Interest and Other Income, Net

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Interest and other income, net

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.

The $4.9 million decrease in interest and other income, net was primarily attributable to a $4.8 million decrease in net interest income and investment amortization resulting from reductions in interest rates and related yields of a smaller portfolio.

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.

Adjusted EBITDA is a non-GAAP financial measure that we define as net loss attributable to Adaptive Biotechnologies Corporation 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.

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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):

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

Year Ended December 31,

Net loss attributable to Adaptive Biotechnologies Corporation

Interest and other income, net

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(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.

See Note 13 of the accompanying notes to our consolidated 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, and again in the year ended December 31, 2020.

We have incurred losses since inception and have incurred negative cash flows from operations since inception through December 31, 2018, and again in the years ended December 31, 2020 and 2021.

As of December 31, 2021, we had an accumulated deficit of $718.9 million.

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

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.

If our available cash, cash equivalents and marketable securities balances and anticipated cash flows 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.

The sale of equity and convertible debt securities may result in dilution to our shareholders and, in the case of preferred equity securities or convertible debt, those securities could provide for rights, preferences or privileges senior to those of our common stock.

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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.

We also expect to make capital expenditures in the near term related to the expansion of our laboratory space and expect to continue investing 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.

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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.

Our contractual obligations as of December 31, 2021 include operating lease obligations of $149.5 million, reflecting the minimum commitments for our office and laboratory spaces in Seattle, Washington and South San Francisco, California, our warehouse lease in Bothell, Washington and our office lease in New York City, New York, as well as a commitment for server space in Seattle, Washington.

See Note 10 of the accompanying notes to our consolidated 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 minimum commitments for laboratory material suppliers, which are generally fulfilled within one year, software and service license commitments, which are generally fulfilled within one to three years, purchase commitments for cloud data storage through our collaboration with Microsoft and royalty commitments.

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.

While we may experience variability in revenue in the near term, 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.

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Year Ended December 31,

Net cash (used in) provided by operating activities

Net cash used in investing activities

Net cash used in operating activities

Net cash provided by (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.

Cash used in operating activities during the year ended December 31, 2021 was $192.7 million, which was primarily attributable to a net loss of $207.3 million and a net change in operating assets and liabilities of $56.8 million, partially offset by noncash share-based compensation of $43.3 million, noncash depreciation and amortization of $21.2 million and noncash lease expense of $7.0 million.

The net change in operating assets and liabilities was primarily due to a $57.7 million reduction in deferred revenue primarily related to revenue recognized from the Genentech Agreement, a $7.4 million increase in accounts receivable, net and a $5.2 million increase in inventory, which were partially offset by an $8.5 million increase in operating lease liabilities, a $3.9 million increase in accounts payable and accrued liabilities primarily related to our corporate bonus to be paid in 2022, and a $1.3 million decrease in prepaid expenses and other assets.

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, partially offset by noncash share-based compensation of $24.8 million, noncash 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.

The net change in our operating assets and liabilities reflects an increase in deferred revenue of $266.9 million, primarily due to the $300.0 million upfront payment by Genentech, and an increase in accounts payable and accrued liabilities of $6.1 million, primarily due to increased headcount and the growth in operating expenditures and timing of vendor payments.

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.

Investing Activities

Cash provided by investing activities during the year ended December 31, 2021 was $181.2 million, which was primarily attributable to proceeds from maturities of marketable securities of $559.5 million, partially offset by purchases of marketable securities of $316.5 million and purchases of property and equipment of $61.7 million.

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.

Financing Activities

Cash provided by financing activities during the year ended December 31, 2021 was $27.1 million, which was primarily attributable to proceeds from the exercise of stock options.

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 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.

We have completed a Section 382 analysis for changes in ownership through December 31, 2020 and continue to monitor for changes that could trigger a limitation.

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

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

NOLs generated prior to 2018 are eligible to be carried forward up to 20 years.

Based on the available objective evidence, management determined that it was more likely than not that the net deferred tax assets would not be realizable as of December 31, 2021.

Accordingly, management applied a full valuation allowance against net deferred tax assets as of December 31, 2021.

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

We have prepared our financial statements in accordance with GAAP.

Our preparation of these financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities and related disclosures at the date of the financial statements, as well as revenue and expense recorded during the reporting periods.

We have prepared our consolidated financial statements in accordance with GAAP.

Our preparation of these consolidated financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities and related disclosures at the date of the consolidated financial statements, as well as revenue and expense recorded during the reporting periods.

We evaluate our estimates and judgments on an ongoing basis.

We base our estimates on historical experience and or other relevant assumptions that we believe to be reasonable under the circumstances.

Estimates are used in several areas, including, but not limited to, estimates of progress to date for certain performance obligations and transaction price for certain contracts with customers, share-based compensation, including the fair value of stock, the provision for income taxes, including related reserves, and goodwill, among others.

Estimates are used in several areas, including, but not limited to, estimates of progress to date for certain performance obligations and the transaction price for certain contracts with customers, the provision for income taxes, including related reserves, and goodwill, among others.

These estimates generally involve complex issues and require judgments, involve the analysis of historical results and prediction of future trends, can require extended periods of time to resolve and are subject to change from period to period.

Actual results may differ materially from management’s estimates.

While our significant accounting policies are described in more detail in Note 2 to our financial statements included elsewhere in this Annual Report on Form 10-K , we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our financial statements.

While our significant accounting policies are described in more detail in Note 2 of the accompanying notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K , we believe the following accounting policies are critical to the judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition

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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.

Share-Based Compensation

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 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 grant date fair value of our stock options were:

Fair value of common stock

Prior to the closing of our initial public offering, the fair value of our common stock issuable upon exercise of stock options was determined by our board of directors, with input from management and independent third-party valuations, as discussed in “— Common Stock Valuations ” below.

For valuations of option grants made after the closing of our initial public offering, our board of directors determines the fair value of each share of common stock based on the closing price of our common stock on the date of grant, or other relevant determination date, as reported on The Nasdaq Global Select Market.

Expected term

Our expected term represents the period that our stock options are expected to be outstanding.

The expected term of options granted to employees and non-employee directors is determined using the “simplified” method, as illustrated in ASC Topic 718, Compensation—Stock Compensation , as we do not have sufficient exercise history to determine a better estimate of expected term.

Under this approach, the expected term is based on the midpoint between the vesting date and the end of the contractual term of the option.

Expected volatility

As we do not have sufficient trading history for our common stock, the expected volatility is based on the historical volatility of our publicly traded industry peers utilizing a period of time consistent with our estimate of the expected term.

The comparable companies are chosen based on their similar size, stage in the life cycle or area of specialty.

Risk-free interest rate

We utilize a risk-free interest rate in the option valuation model based on U.S.

Treasury zero-coupon issues with remaining terms similar to the expected term of the options.

Expected dividend yield

We do not anticipate paying any cash dividends in the foreseeable future and, therefore, use an expected dividend yield of zero in the option valuation model.

Black-Scholes 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,

Fair value of common stock

$17.68 - $55.23

$7.80 - $47.81

Expected term (in years)

Risk-free interest rate

Expected volatility

70.5% - 73.3%

64.3% - 72.9%

65.0% - 69.2%

Expected dividend yield

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.

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 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.

Prior to our initial public offering, given the absence of a public trading market for our common stock, the valuations of our common stock were determined in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation .

The assumptions we used in the valuation model were based on future expectations combined with management’s judgment.

In the absence of a public trading market, our board of directors, with input from management, exercised significant judgment and considered numerous objective and subjective factors to determine the fair value of our common stock as of the date of each option grant, including the following factors:

independent valuations performed at periodic intervals by an independent third-party valuation firm;

the prices, rights, preferences and privileges of our convertible preferred stock relative to our common stock;

our operating and financial performance, forecasts and capital resources;

current business conditions;

the hiring of key personnel;

our stage of commercialization;

the status of research and development efforts;

the likelihood of achieving a liquidity event for the shares of common stock issuable upon exercise of these stock options, such as an initial public offering or sale of our company, given prevailing market conditions;

any adjustment necessary to recognize a lack of marketability for our common stock;

trends and developments in our industry;

the market performance of comparable publicly traded technology companies;

and global economic and capital market conditions.

In valuing our common stock prior to the closing of our initial public offering, we utilized a hybrid methodology that includes a probability-weighted expected return method (“PWERM”) and an option pricing method (“OPM”), which is a highly complex and subjective valuation methodology.

Under a PWERM, the fair market value of the common stock is estimated based upon an analysis of future values for the enterprise assuming various future outcomes.

Within one of those potential outcomes, we utilized the OPM.

The OPM treats the rights of the holders of convertible preferred stock and common stock as equivalent to that of call options on any value of the enterprise above certain break points of value based upon the liquidation preferences of the holders of preferred stock, as well as their rights to participation and conversion.

Based on the timing and nature of an assumed liquidity event in each scenario, a discount for lack of marketability either was or was not applied to each scenario, as appropriate.

We then probability-weighted the value of each expected outcome to arrive at an estimate of fair value per share of common stock.

For valuations after the closing of our initial public offering, our board of directors determines the fair value of each share of common stock based on the closing price of our common stock on the date of grant, or other relevant determination date, as reported on The Nasdaq Global Select Market.

Goodwill represents the excess of the purchase price over the net amount of identifiable assets acquired and liabilities assumed in a business combination measured at fair value.

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We evaluate certain qualitative factors such as macroeconomic conditions, the market and industry in which we operate, cost factors, overall financial performance and other relevant entity-specific events to determine if there are any negative trends or events that could indicate impairment.

Key assumptions in this analysis include anticipated demand for our products and services, including industry and regulatory changes, future revenue growth and cash, cash equivalents and marketable securities on hand.

Key assumptions in this analysis include anticipated demand for our products and services, including industry and regulatory changes, future revenue growth and cash flow trends.

These assumptions are determined based on our historical performance and management’s forecasted results.

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Goodwill impairment exists when the estimated fair value of our one reporting unit is less than its carrying value.

If impairment exists, the carrying value of the goodwill is reduced to fair value through an impairment charge recorded in our statements of operations.

If impairment exists, the carrying value of the goodwill is reduced to fair value through an impairment charge recorded in our consolidated statements of operations.

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

Recent Accounting Pronouncements

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