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Item 7. Management’s Discussion and Analysis

2021-02-25 compared with 2020-03-25 · 155 added, 143 removed, 214 unchanged (58% of the section changed)

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes and other financial information included elsewhere in this Annual Report on Form 10-K and our final prospectus filed with the Securities and Exchange Commission (the “SEC”) pursuant to Rule 424(b) under the Securities Act of 1933, as amended, on June 20, 2019 (the “Prospectus”).

In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs.

Our actual results could differ materially from those discussed in the forward-looking statements.

You should review the sections titled “Special Note Regarding Forward-Looking Statements” for a discussion of forward-looking statements and in Part I, Item 1A, “Risk Factors” for a discussion of factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis and elsewhere in this Annual Report on Form 10-K and in our Prospectus.

This section of this Form 10-K generally discusses 2019 and 2018 items and year-to-year comparisons between 2019 and 2018.

Discussions of 2017 items and year-to-year comparisons between 2018 and 2017 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Prospectus.

We are a growing cancer genomics company transforming the development of next-generation therapies by providing more comprehensive molecular data about each patient’s cancer and immune response.

We designed our NeXT Platform to adapt to the complex and evolving understanding of cancer, providing our biopharmaceutical customers with information on all of the approximately 20,000 human genes, together with the immune system, in contrast to many cancer panels that cover roughly 50 to 500 genes.

In parallel with the development of our platform technology, we have also provided population sequencing services under contract with the U.S.

In parallel with the development of our platform technology, we have also pursued business within the population sequencing market, and we have provided whole genome sequencing services under contract with the U.S.

Department of Veterans Affairs (the “VA”) Million Veteran Program (the “VA MVP”), which has enabled us to innovate, scale our operational infrastructure, and achieve greater efficiencies in our lab.

We are also developing a complementary liquid biopsy assay that analyzes all of the approximately 20,000 human genes versus the more narrowly focused liquid biopsy assays that are currently available.

In September 2020, we announced receipt of a new task order from the VA MVP with an approximate value of up to $31 million.

The cumulative value of task orders received from the VA MVP since inception is approximately $175 million, approximately $132.5 million of which we had recognized as revenue as of December 31, 2020.

In August 2020, we launched NeXT Liquid Biopsy, which is a liquid biopsy assay that analyzes all of the approximately 20,000 human genes versus the more narrowly focused liquid biopsy assays that are currently available.

By combining technological innovation, operational scale, and regulatory differentiation, our NeXT Platform is designed to help our customers obtain new insights into the mechanisms of response and resistance to therapy as well as new potential therapeutic targets.

Our platform enhances the ability of biopharmaceutical companies to unlock the potential of conducting translational research in the clinic rather than with pre-clinical animal models or cancer cell lines.

We also announced in January 2020 a diagnostic based on our NeXT Platform that we envision being used initially by both leading clinical cancer centers as well as biopharmaceutical companies.

We generated revenues of $65.2 million, $37.8 million, and $9.4 million for the years ended December 31, 2019, 2018, and 2017, respectively.

In 2019, 67% of our revenues were generated from the U.S.

Department of Veterans Affairs (the “VA”) Million Veteran Program (the “VA MVP”) as compared to 49% in 2018.

Non-VA MVP revenues increased by 13% in 2019 compared to 2018.

We also incurred net losses of $25.1 million, $19.9 million and $23.6 million for the years ended December 31, 2019, 2018, and 2017, respectively.

As of December 31, 2019, we had $128.3 million in cash and cash equivalents, and short-term investments.

From inception through December 31, 2019, we have funded our operations primarily through cash from operations, redeemable convertible preferred stock issuances, debt issuances, and proceeds from our initial public offering.

We expect that our existing cash and cash equivalents, and short-term investments will provide sufficient funds to sustain operations through at least the next 12 months.

We have based these estimates on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect.

We also announced in January 2020 a diagnostic test, NeXT Dx Test, which is based on our NeXT Platform, that we envision being used initially by both leading clinical cancer centers as well as biopharmaceutical companies.

Most recently, in December 2020, we launched two new capabilities that are integrated into our NeXT Platform:

our Systemic HLA Epitope Ranking Pan Algorithm (“SHERPA”) machine learning-based tool for the comprehensive identification and characterization of cancer neoantigens, as well as our Neoantigen Presentation Score (“NEOPS”) for predicting cancer immunotherapy response.

SHERPA enables the development of new neoantigen-based diagnostic biomarkers, such as our NEOPS, and novel personalized therapies.

We have the capacity to sequence and analyze approximately 200 trillion bases of DNA per week in our facility.

We believe our capacity for this is already larger than the sequencing capacities of most cancer genomics companies, and we continue to build automation and other infrastructure to scale further as demand increases and in support of our NeXT Liquid Biopsy.

To date, we have sequenced more than 150,000 human samples, of which more than 100,000 were whole human genomes.

On August 14, 2020, we completed a follow-on equity offering in which we issued and sold 6,578,947 shares of common stock at a public offering price of $19.00 per share.

We received net proceeds of $117.5 million after deducting underwriting discounts and commissions.

We also incurred $0.4 million of offering expenses, including legal, accounting, printing and other offering-related costs.

Subsequent to the fiscal period ended December 31, 2020 covered by this Annual Report on Form 10-K, on January 29, 2021, we completed another follow-on equity offering in which we issued and sold 3,950,000 shares of common stock at a public offering price of $38.00 per share.

We received net proceeds of $141.1 million after deducting underwriting discounts and commissions.

The underwriters exercised their option to purchase an additional 592,500 shares shortly thereafter, resulting in additional net proceeds to us of $21.2 million after deducting underwriting discounts and commissions.

In total, we raised net proceeds of $162.3 million after deducting underwriting discounts and commissions.

We also incurred an estimated $0.4 million of offering expenses, including legal, accounting, printing and other offering-related costs.

Our operations have been impacted by the ongoing COVID-19 pandemic.

While the state and county reopening and health orders applicable to us allow for continued operation of so-called Essential Businesses, which includes certain critical healthcare operations and services, we have substantially closed our office facilities and limited access to our laboratory facilities to protect our employees and to comply with the provisions described within the orders.

We provided temporary increased pay to certain laboratory personnel in the second quarter for their work during the COVID-19 pandemic.

Such increased pay was not provided in the third or fourth quarters, but we may decide to resume increased pay in the future.

The previous shelter-in-place order and current reopening and health orders have negatively impacted productivity, disrupted our business, and slowed research and development activities due to us limiting access to our laboratory space that would otherwise be used by our research and development group, and, to the extent such orders remain in place, they may continue to cause such effects on our operations.

The reopening and health orders may disrupt the ability of our suppliers to fulfill our purchase orders in a timely manner or at all.

Additionally, we are aware of increased demand in the market for certain consumables used in COVID-19 test kits.

We use such consumables in our operations, and we may face difficulties in acquiring such consumables if our suppliers prioritize orders related to COVID-19.

Several of our customers, including the VA MVP, were delayed in sending us samples in the second and third quarters due to the inability to collect or ship samples during the

COVID-19 pandemic, and these and additional customers may be disrupted from collecting samples or sending purchase orders and samples to us in the future.

Many of our customers, potential customers and potential partners have also put in place policies restricting visitors from other companies, and therefore our sales team and members of management have been unable to meet such parties in person, which may result in reduced acquisition of new customers, fewer orders from existing customers, and fewer potential partnering opportunities.

If our laboratory employees were to contract COVID-19, we may significantly curtail our laboratory operations or pause operations altogether until the imminent health risk to our employees subsided.

Such disruptions in our operations, and our customers’ and suppliers’ operations, may continue to adversely affect revenues and operating results.

The global COVID-19 pandemic continues to rapidly evolve and to present serious health risks.

While authorities in some areas have lifted or relaxed certain of the restrictions described above, in some cases they have subsequently re-imposed various restrictions after observing an increased rate of COVID-19 cases;

for example, in December 2020, state and local authorities in California reinstated shelter-in-place orders in light of the increasing rate of COVID-19 cases and shortage of intensive care unit beds across the state.

Furthermore, there is no guarantee when or if all such restrictions will be eliminated, such that we and our customers, manufacturers and suppliers will be able to safely resume operations consistent with our pre-COVID-19 operations.

Vaccines against COVID-19 have been approved by the FDA and other regulatory authorities, but there is uncertainty as to when these vaccines will be widely available to our employees and the population at large and how quickly and to what extent the vaccines will impact the COVID-19 pandemic.

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

Factors Affecting Our Performance

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Increasing adoption of our products and solutions by existing customers.

O ur performance depends on our ability to retain and broaden adoption with existing customers.

Because our technology is novel, some customers begin using our platform by initiating pilot studies involving a small number of samples to gain experience with o ur service.

Our performance depends on our ability to retain and broaden adoption with existing customers.

Because our technology is novel, some customers begin using our platform by initiating pilot studies involving a small number of samples to gain experience with our service.

As a result, historically a significant portion of our revenues has come from existing customers.

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Investment in product innovation to support commercial growth.

Investment in research and development, including the development of new products is critical to establish and maintain our leading position.

In particular, we have invested in NeoantigenID, a neoantigen characterization report, ImmunogenomicsID, a broad biomarker report, and ImmunoID NeXT, our universal cancer immunogenomics platform.

We are also collaborating with key opinion leaders from academic cancer centers, such as Inova Health System, Stanford Medicine, and the Parker Institute for Cancer Immunotherapy, to support the utility of our platform.

Investment in research and development, including the development of new products and capabilities is critical to establish and maintain our leading position.

We have invested significantly in our NeXT Platform, introducing two new products and additional capabilities in 2020 alone:

NeXT Liquid Biopsy (exome-wide liquid biopsy platform), NeXT Dx Test (comprehensive genomic cancer profiling test enabling advanced composite biomarkers for cancer treatment), NeXT SHERPA and NeXT NEOPS (neoantigen prediction capabilities).

We are currently investing in the development of future new product offerings, including NeXT Personal (liquid biopsy offering for personalized tumor tracking for patients), NeXT CDx (diagnostic test), and NeXT Database (comprehensive tumor immune-genomics database).

We are also collaborating with key opinion leaders from academic cancer centers, such as Inova Health System and the Parker Institute for Cancer Immunotherapy, to support the clinical utility of our platform.

We believe this work is critical to gaining customer adoption and expect our investments in these efforts to increase.

We believe utility for our product may result in additional expenditures to develop and market new products, including a diagnostic or database.

Leverage our operational infrastructure.

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

In addition to the factors described above, as our headquarters and laboratory operations are located in San Mateo County, California, our operations have been impacted by the ongoing COVID-19 pandemic.

On March 16, 2020, the Health Officer of the County of San Mateo (the “Health Officer”) issued a shelter-in-place order (the “San Mateo Order”), which directed all businesses to cease non-essential operations at physical locations in the county.

The San Mateo Order also directed all individuals living in the county to shelter at their place of residence with limited exceptions.

The intent of the San Mateo Order is to slow the spread of COVID-19 to the maximum extent possible.

The San Mateo Order became effective on March 17, 2020 and will continue to be in effect through April 7, 2020, or until it is extended, rescinded, superseded, or amended in writing by the Health Officer.

Similar orders were issued in neighboring counties, including Santa Clara County, such that the substantial majority of our employees are subject to a shelter-in-place order.

While the San Mateo Order allows for continued operation of so-called Essential Businesses, which includes certain critical healthcare operations and services, to comply with the San Mateo Order, we are prioritizing the fulfillment of customer orders to those related to time-sensitive healthcare projects, such as in-process clinical trials, and will fulfill other customer orders to the extent we have the ability to do so with limited laboratory staffing.

In addition, on March 19, 2020, the Governor of California and the State Public Health Officer and Director of the California Department of Public Health ordered all individuals living in the State of California to stay at their place of residence for an indefinite period of time (subject to certain exceptions to facilitate authorized necessary activities) to mitigate the impact of the COVID-19 pandemic (the “California Order” and, together with the San Mateo Order, the “Orders”).

Other states in the United States, including Massachusetts and New York, have followed suit by issuing orders with similar goals and restrictions.

Beyond the immediate impact of the Orders to our operations, the ongoing COVID-19 pandemic , the Orders, and similar orders issued by other authorities to impose restrictions intended to mitigate the impact of the COVID-19 pandemic , may disrupt our supply chain, including our ability to acquire raw materi als, disrupt customer demand, reduce our ability to receive customer samples on a normal basis, disrupt our customer and vendor relationships, divert management attention, and negatively impact employee productivity due to work-from-home policies.

The scop e and duration of such impact is highly uncertain.

We are unable to predict or quantify the impact of any potential disruption to our supply chain, changes in consumer demand , or any other actions that may become necessary as events unfold.

Components of Operating Results

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Our ability to increase our revenues will depend on our ability to further penetrate this market.

To do this, we are developing a growing set of additional state-of-the-art products, advancing our operational infrastructure, building our regulatory credentials and expanding our targeted marketing efforts.

To do this, we are developing a growing set of state-of-the-art products, advancing our operational infrastructure, expanding our international presence, building our regulatory credentials, and expanding our targeted marketing efforts.

Unlike diagnostic or therapeutic companies, we have not to date sought reimbursement through traditional healthcare payors.

We sell through a small direct sales force.

We derive a substantial portion of our current and expected future revenues from sales of our DNA sequencing and data analysis services to the VA MVP.

Our contract with the VA MVP does not include specific testing turnaround times.

Therefore, we have the ability to modulate the volume of samples processed for the VA MVP up or down to complement sample volumes from all other customers, which can vary from period to period.

We have one reportable segment from the sale of sequencing and data analysis services.

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Costs of revenues

Costs of revenues consist of production material costs, personnel costs (salaries, bonuses, benefits, and stock-based compensation), costs of consumables, laboratory supplies, depreciation and service maintenance on capitalized equipment, and information technology (“IT”) and facility costs.

We expect the costs of revenues to increase as our revenues grow, but the cost per unit of data delivered to decrease over time due to economies of scale we may gain as volume increases, automation initiatives, and other cost reductions.

Costs of revenues consist of raw materials costs, personnel costs (salaries, bonuses, stock-based compensation, payroll taxes, and benefits), laboratory supplies and consumables, depreciation and maintenance on equipment, and allocated facilities and information technology (“IT”) costs.

We expect costs of revenues to increase as our revenues grow, and in the short term costs of revenues may outpace revenue growth as we invest in expanding our laboratory capacity, but over time the cost per sample processed is expected to decrease due to economies of scale we may gain as volume increases, automation initiatives, and other cost reductions.

Research and development expenses

Research and development expenses consist of costs incurred for the development of our products.

These expenses consist primarily of payroll and personnel costs (salaries, bonuses, benefits, and stock-based compensation), costs of consumables, laboratory supplies, depreciation and service maintenance on capitalized equipment, and IT and facility costs.

Research and development expenses consist of costs incurred for the research and development of our products.

These expenses consist primarily of personnel costs (salaries, bonuses, stock-based compensation, payroll taxes, and benefits), laboratory supplies and consumables, costs of purchasing samples for research purposes, depreciation and maintenance on equipment, and allocated facilities and IT costs.

We include in research and development expenses the costs to further develop software we use to operate our laboratory, analyze the data it generates, and automate our operations.

These expenses also include costs associated with our collaborations, which we expect to increase over time.

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Selling, general, and administrative expenses

Selling expenses consist of personnel costs, customer support expenses, direct marketing expenses, educational and promotional expenses, and market research.

Selling expenses consist of personnel costs (salaries, commissions, bonuses, stock-based compensation, payroll taxes, and benefits), customer support expenses, direct marketing expenses, and market research.

Our general and administrative expenses include costs for our executive, accounting, finance, legal, and human resources functions.

These expenses consist of personnel costs, audit and legal expenses, consulting costs, and IT and facility costs.

These expenses consist of personnel costs (salaries, bonuses, stock-based compensation, payroll taxes, and benefits), corporate insurance, audit and legal expenses, consulting costs, and allocated facilities and IT costs.

We expense all selling, general and administrative expenses as incurred.

We expect our selling expenses will continue to increase in absolute dollars, primarily driven by our efforts to expand our commercial capability and to expand our brand awareness and customer base through targeted marketing initiatives with an increased presence both within and outside the United States.

We also expect general and administrative expenses will increase as we scale our operations.

We also expect general and administrative expenses to increase as we scale our operations.

Interest Income

Interest income consists primarily of interest earned on our cash and cash equivalent s , and short-term investments.

Interest income increased significantly in 2019 as a result of us investing proceeds from the IPO.

We expect a continued higher level of interest income in 2020 for this reason.

Interest income consists primarily of interest earned on our cash and cash equivalents and short-term investments.

Interest income increased significantly beginning in the second half of 2019 as a result of us investing proceeds from the initial public offering of our common stock in June 2019 (our “IPO”).

More recently, interest income has been adversely impacted by recent declines in yields on debt securities.

We expect that our interest income will continue to decline in the near future as the decline in yields is expected to more than offset the increased investments balances after our August 2020 and January 2021 follow-on offerings.

Interest Expense

Interest expense primarily consists of cash and non-cash interest costs related to our term loan, convertible promissory notes, revolving loan, and growth capital loan.

We record costs incurred in connection with the issuance of debt as a direct deduction from the debt liability.

We amortize these costs over the term of our debt agreements as interest expense in our consolidated statements of operations.

After the payoff of our growth capital loan in August 2019, we no longer have any outstanding debt and have not incurred interest expense from that point forward.

Previously, interest expense primarily consisted of cash and non-cash interest costs related to our term loan, convertible promissory notes, revolving loan and security agreement (the “Revolving Loan”) with TriplePoint Capital LLC (“TriplePoint”), and growth capital loan (the “Growth Capital Loan”) with TriplePoint.

After the payoff of our Growth Capital Loan in August 2019, we no longer have any outstanding debt and have not incurred material interest expense from that point forward.

Loss on Debt Extinguishment

We incurred loss on debt extinguishment in 2018 resulting from changes in the maturity dates of the convertible notes issued in 2017.

We also incurred loss on debt extinguishment in 2019 upon the payoff of the growth capital loan.

We incurred a loss on debt extinguishment in 2018 resulting from changes in the maturity dates of the convertible notes issued in 2017.

We also incurred a loss on debt extinguishment in 2019 upon the payoff of the Growth Capital Loan.

See Note 6 to our consolidated financial statements included elsewhere in this annual report.

Other (Expense) Income, Net

Other (expense) income, net consists of changes in the fair value of the compound derivative instrument, changes in fair value of convertible preferred stock warrant liability, and foreign currency exchange gains and losses.

Future periods will not include changes in fair value of the compound derivative instrument, due to extinguishment of the related convertible notes, nor will future periods include changes in fair value of convertible preferred stock warrants, due to the conversion of such warrants to common stock warrants.

See Notes 6 and 10 included elsewhere in this annual report for further discussion of these two items.

Other Income (Expense), Net

Other income (expense), net consists primarily of foreign currency exchange gains and losses.

In 2019, other income (expense), net also consisted of changes in fair value of convertible preferred stock warrant liability.

Due to the conversion of convertible preferred stock warrants to common stock warrants upon our IPO, changes in fair value of such warrants are no longer recorded through income since our IPO.

See Note 10 to our consolidated financial statements included elsewhere in this annual report for further discussion of this item.

We expect our foreign currency gains and losses to continue to fluctuate in the future due to changes in foreign currency exchange rates.

Results of Operations

The following table sets forth our consolidated statements of income data (in thousands):

Trend Financial Information

The following selected consolidated financial data should be read in conjunction with the consolidated financial statements and the notes thereto in Item 8 of Part II, “Financial Statements and Supplementary Data”.

Historical results are not necessarily indicative of future results.

Year Ended December 31,

Consolidated Statements of Operations:

(in thousands, except share and per share data)

Costs and expenses

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Weighted-average shares outstanding, basic and diluted

Consolidated Balance Sheet Data:

(in thousands)

Cash and cash equivalents, and short-term investments

Working capital

Long-term obligations

Total liabilities

Redeemable convertible preferred stock

Total stockholders' equity (deficit)

Results of Operations

This section of this Annual Report on Form 10-K generally discusses 2020 and 2019 items and year-to-year comparisons between 2020 and 2019.

Discussions of 2018 items and year-to-year comparisons between 2019 and 2018 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2019.

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

Year Ended December 31,

Percentage change

Years Ended December 31,

All other customers

Total revenues

The following table shows our concentration of revenues by customer:

The following table shows concentration of revenues by customer:

Year Ended December 31,

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* Less than 10% of revenues

The increase in 2019 revenues from the VA MVP was driven by an increase in the volume of samples we tested in the period, partially offset by lower prices per sample.

The increase in revenues from the VA MVP in 2020 was driven by an increase in the volume of samples we tested in the period.

This increase was driven by a significant rise in the number of samples we received from the VA MVP for testing during 2020 compared to those received for testing during 2019.

Our increasingly automated laboratory has supported this higher level of sample volumes.

All Other Customers

The increase in 2019 revenues from all other customers was primarily due to an increase in the volume of samples we tested in relation to the sequencing and data analysis services we provided to our customers.

The increase in revenues from all other customers in 2020 was driven primarily by an increase in the volume of samples we tested in the period.

Approximately $1.0 million of the increase was attributed to a new biobank customer and $0.65 million of the increase in revenues was related to the completion of a research collaboration with a biopharmaceutical customer in the gene therapy space.

Approximately one-third of total revenues from all other customers were derived from our NeXT Platform products, whereas revenues from NeXT products in 2019 were insignificant.

Costs and Expenses

Year Ended December 31,

Percentage change

(in thousands)

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Costs of revenues

The increase in 2019 was primarily due to the increase in revenues discussed above.

The cost components related to the increase in costs of revenues were an $11.7 million increase in production materials, a $2.2 million increase related to personnel costs including salaries, bonuses, benefits, and stock-based compensation expenses, a $1.6 million increase in depreciation and service maintenance on capitalized equipment, a $0.5 million increase in the consumption cost of consumables and laboratory supplies, a $0.9 million increase in IT and facility costs, and a $0.3 million increase in other costs.

The increase in costs of revenues in 2020 was primarily due to the increase in revenue volume, including from the VA MVP, discussed above.

The cost components related to the increase in costs of revenues were a $10.3 million increase in raw materials due primarily to higher VA MVP sample volumes;

a $2.3 million increase related to personnel-related costs;

a $0.9 million increase in depreciation and maintenance costs due to our additions of laboratory equipment;

a $0.8 million increase in the cost of laboratory supplies and consumables;

a $0.6 million increase in IT and facility costs;

and a $0.5 million increase in other costs.

Costs of revenues increased more than revenues primarily due to increased raw materials costs and the addition of laboratory personnel in anticipation of higher future laboratory throughput.

Research and development

The increase in 2019 was primarily due to increased development activities for new product offerings, lab and automation development costs, and IT and facility costs.

Research and development expenses increased due to an increase of $4.0 million in personnel-related expenses, including salaries, bonuses, benefits, and stock-based compensation expenses, a $2.8 million increase in laboratory and automation supplies consumed, a $1.2 million increase in depreciation, service maintenance on capitalized equipment, and cost of expensed equipment, and $0.2 million increase in other costs.

The increase in research and development in 2020 was primarily due to development of new products and capabilities (such as those noted in the Factors Affecting Our Performance section above) and lab automation efforts, and consisted of an increase of $6.1 million in personnel-related costs;

a $0.9 million increase in IT and facilities costs;

and a $0.7 million increase in other costs, partially offset by a $1.5 million decrease in laboratory supplies and consumables for research and development projects.

Selling, general and administrative

The increase in 2019 was due to a $7.3 million increase in personnel-related expenses including salaries, bonuses, benefits, and stock-based compensation expenses primarily related to increased headcount, a $3.0 million increase in professional services primarily related to public company-related costs (including corporate insurance, audit fees, and legal expenses), and a $0.5 million increase in other costs.

Interest income, interest expense, and loss on debt extinguishment

The increase in selling, general and administrative in 2020 was due to a $8.8 million increase in personnel-related costs primarily related to increased headcount to support expansion of our commercial team;

a $3.0 million increase in professional services primarily related to public company-related costs (including corporate insurance, audit fees, and legal expenses), partially offset by a $0.2 million decrease in other costs.

Interest Income, Interest Expense, Loss on Debt Extinguishment and Other Income (Expense), Net

Year Ended December 31,

Percentage change

(in thousands)

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Loss on debt extinguishment

Total interest income, interest expense and loss on debt extinguishment

Other income (expense), net

Interest income

The increase in 2019 was due to investments of proceeds from our IPO.

The decrease in interest income in 2020 was driven by declines in yields on debt securities, partially offset by higher average cash and investment balances subsequent to our follow-on offering in August 2020.

Interest expense

The lower interest expense in 2019 was due to the repayment of the $20 million growth capital loan in August 2019, which resulted in no further outstanding debt for the remainder of the year, as well as 2018 including significant interest expense from the Convertible Notes and Revolving Loan.

Interest expense in 2019 included cash and non-cash interest expense related to the Revolving Loan and Growth Capital Loan.

The Revolving Loan was paid off in late March 2019 with proceeds from the Growth Capital Loan.

The Growth Capital Loan was fully repaid in August 2019.

Since we repaid the Growth Capital Loan, we have had no outstanding debt and therefore did not incur significant interest expense in 2020.

Loss on debt extinguishment

The $1.7 million loss on debt extinguishment in 2019 resulted from the extinguishment of our $20 million Growth Capital Loan facility.

The $4.7 million loss on debt extinguishment in 2018 resulted from changes in the maturity dates of the Convertible Notes issues in 2017.

Other (expense) income, net

Year Ended December 31,

(in thousands)

Changes in fair values of warrants for Series B and Series C convertible preferred stock

Changes in fair value of the compound derivative instrument

Total other (expenses) income, net

Other expenses, net in 2019 were primarily comprised of a $1.4 million increase in the fair values of warrants for Series B and Series C redeemable convertible preferred stock.

Other income, net in 2018 was primarily comprised of a $0.6 million decrease in fair value of the compound derivative instrument, partially offset by a $0.4 million increase in the fair values of warrants for Series B and Series C redeemable convertible preferred stock.

Other Income (Expense), Net

Other expense in 2020 was primarily comprised of foreign currency remeasurements.

Other expense in 2019 was primarily comprised of increases in the fair values of warrants for Series B and Series C redeemable convertible preferred stock as a result of increases to the estimated fair value of our equity during the period.

Liquidity and Capital Resources

The following table presents selected financial information and statistics as of and for the years ended December 31, 2019, 2018, and 2017 (in thousands):

Year Ended December 31,

(in thousands)

The following tables present selected financial information and statistics as of and for the years ended December 31, 2020, 2019, and 2018 (in thousands):

Cash and cash equivalents, and short-term investments

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Working capital

Cash (used in) provided by operating activities

Cash used in investing activities

Cash provided by (used in) financing activities

From our inception through December 31, 2019, we have funded our operations primarily from $144.0 million in net proceeds from our initial public offering in June 2019 and $89.6 million from issuance of redeemable convertible preferred stock, as well as ca sh from operations and debt financing.

On March 22, 2019, we received $20.0 million in gross cash proceeds from a growth capital loan.

As of December 31, 2019, we had cash and cash equivalents in the amount of $ 55.0 million.

Year Ended December 31,

Net cash (used in) provided by operating activities

Net cash used in investing activities

Net cash provided by (used in) financing activities

From our inception through December 31, 2020, we have funded our operations primarily from $117.5 million in net proceeds from our follow-on offering in August 2020, $144.0 million in net proceeds from our IPO in June 2019, and $89.6 million from issuance of redeemable convertible preferred stock, as well as cash from operations and debt financing.

As of December 31, 2020, we had cash and cash equivalents in the amount of $68.5 million and short-term investments in the amount of $134.8 million.

We have incurred net losses since our inception.

We anticipate that our current cash and cash equivalents and marketable securities, together with cash provided by operating activities are sufficient to fund our near-term capital and operating needs for at least the next 12 months.

We anticipate that our current cash and cash equivalents and short-term investments, together with cash provided by operating activities, are sufficient to fund our near-term capital and operating needs for at least the next 12 months.

We have based these future funding requirements on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect.

If our available cash balances, net proceeds from the offering and anticipated cash flow from operations are insufficient to satisfy our liquidity requirements including because of lower demand for our services or other risks described in this annual report, we may seek to sell additional common or preferred equity or convertible debt securities, enter into an additional credit facility or another form of third-party funding or seek other debt financing.

If our available cash balances, net proceeds from the offerings and anticipated cash flow from operations are insufficient to satisfy our liquidity requirements, including because of lower demand for our services or other risks described in this Annual Report on Form 10-K, such as the COVID-19 pandemic, we may seek to sell additional common or preferred equity or convertible debt securities, enter into an additional credit facility or another form of third-party funding or seek other debt financing.

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

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

On March 22, 2019, we entered into a growth capital loan (the “Growth Capital Loan”) with TriplePoint to provide for a $20.0 million growth capital loan facility and as of June 30, 2019, had drawn down the full $20.0 million available under the facility.

We used $5.1 million of the Growth Capital Loan to repay, in its entirety, all amounts outstanding under the Revolving Loan.

Borrowings under the Growth Capital Loan bore interest at a floating rate of prime, plus 5.00%, for borrowings up to $15.0 million and the prime rate plus 6.50% for borrowings greater than $15.0 million.

Under the agreement, we were required to make monthly interest-only payments through April 1, 2020 and required to make 36 equal monthly payments of principal, plus accrued interest, from April 1, 2020 through March 1, 2023, when all unpaid principal and interest was to become due and payable.

The agreement allowed voluntary prepayment of all, but not part, of the outstanding principal at any time prior to the maturity date, subject to a prepayment fee of 1.00% of the outstanding balance if prepaid in months one through 12 of the loan term.

In addition to the final payment, we paid an amount equal to 2.75% of each principal amount drawn under this growth capital loan facility.

In connection with the Growth Capital Loan, we issued a warrant to purchase 65,502 shares of common stock to TriplePoint at an exercise price of $9.16 per share exercisable for seven years from March 22, 2019.

We recorded the issuance-date fair value of the warrant of $0.6 million and fees paid to TriplePoint of $0.3 million as a debt discount, which was amortized over the term of the Growth Capital Loan using the effective interest method.

Upon issuance, the Growth Capital Loan had an effective interest rate of 15.23% per year.

Interest expense for the year ended December 31, 2019 was $1.0 million.

On August 14, 2019, we paid off the Growth Capital Loan in its entirety and recorded a $1.7 million loss on extinguishment of debt in the consolidated statements of operations.

Our short-term investments portfolio is primarily invested in highly rated securities, with the primary objective of minimizing the potential risk of principal loss.

Our investment policy generally requires securities to be investment grade and limits the amount of credit exposure to any one issuer.

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

During 2019, cash used by operating activities of $18.1 million was a result of $25.1 million of net loss and the net negative change in operating assets and liabilities of $7.3 million, partially offset by non-cash negative adjustments to net income of $14.3 million.

Cash used by investing activities of $81.6 million during 2019 consisted of purchases of available-for-sale debt securities, net of maturities and sales, of $73.2 million, and cash used to acquire property and equipment of $8.4 million.

Cash provided by financing activities of $134.9 million during 2019 consisted primarily of $139.8 million of proceeds from initial public offering, net of underwriting discounts and commissions, $1.4 million of proceeds from issuance of common stock under employee stock plans, and net proceeds from the issuance of a Growth Capital Loan of $20.0 million, partially offset by cash used to repay a revolving loan and issue and repay the Growth Capital Loan of $26.3 million.

Investments in property and equipment

The Company’s capital expenditures were $8.4 million during 2019, which was primarily related to the acquisition of property and equipment used for our sequencing and data analysis services.

During 2020, cash used in investing activities was $65.1 million due to net purchases of short-term investments of $61.9 million and $3.2 million acquisitions of property and equipment used for our sequencing and data analysis services.

Cash provided by financing activities of $121.3 million during the same period consisted of $117.5 million net proceeds from our August 2020 follow-on offering, $2.8 million proceeds from stock option exercises, and $1.4 million proceeds from ESPP purchases, partially offset by $0.4 million payments in offering costs.

During 2019, cash used by investing activities of $81.6 million consisted of net purchases of short-term investments of $73.2 million and cash used to acquire property and equipment of $8.4 million .

Cash provided by financing activities of $134.9 million during 2019 consisted primarily of $139.8 million of proceeds from our IPO, net of underwriting discounts and commissions, $1.4 million of proceeds from issuance of common stock under employee stock plans, and net proceeds from the issuance of a Growth Capital Loan of $20.0 million, partially offset by cash used to repay a revolving loan and issue and repay the Growth Capital Loan of $26.3 million.

Material Cash Requirements for Known Contractual and Other Obligations

The following is a description of commitments for capital expenditures and other known and reasonably likely cash requirements as of December 31, 2020.

We anticipate fulfilling such commitments with our existing cash and cash equivalents and short-term investments, which amounted to $203.3 million as of December 31, 2020.

Our non-cancellable operating lease payments were $15.5 million as of December 31, 2020.

The timing of these future payments, by year, can be found in Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial Statements in Note 7, “Leases.”

We had capital expenditures commitments in the amount of approximately $1.7 million as of December 31, 2020, which was comprised primarily of laboratory equipment and computer equipment.

Such purchases will likely occur within the first half of 2021.

Furthermore, overall capital expenditures in 2021 will likely exceed total capital expenditures in 2020.

We previously entered into various forms of convertible debt and revolving loans to finance our operations prior to our IPO.

After our IPO, we paid off all remaining debt and now have zero outstanding debt balances as of 2019.

Further information regarding the Company’s debt issuances can be found in Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial Statements in Note 6, “Borrowings.”

Contractual Obligations

As a “smaller reporting company”, we are not required to provide this disclosure.

Off-balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of December 31, 2019.

We paid off all remaining debt in August 2019 and have incurred no additional debt since.

Further information regarding the Company’s debt issuances and payment commitments can be found in Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial Statements in Note 6, “Borrowings.”

Certain of our customers prepay us for a portion of the services that they expect to order from us before they place purchase orders and we deliver those services.

In some cases, this prepayment can be substantial and may be paid months or a year or more in advance of these customers providing samples to us and before our delivery of the services to which some or all of the deposit relates.

As of December 31 , 2020, we had approximately $ 21.0 million in customer deposits, including $ 18.4 million from one customer.

We are generally not required by our contracts to retain these deposits in cash or otherwise and we have generally used these deposits to make capital expenditures and fund our operations.

When a customer that has prepaid us for future services cancels its contract with us or reduces the level of services that it expects to receive, we are required to repay that customer’s deposit with little or no notice.

We do not expect to refund material amounts of cash under such circumstances.

Critical Accounting Policies and Estimates

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Revenue Recognition

Adoption of ASC Topic 606, “Revenue from Contracts with Customers”

On January 1, 2017, we early adopted the new accounting standard ASC Topic 606 using the full retrospective method.

Results for reporting periods beginning after January 1, 2017, are presented under ASC Topic 606.

The impact of adopting ASC Topic 606 was not material on our consolidated financial statements.

Revenue Recognition

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

Upon adoption of ASC Topic 606, we have evaluated the performance obligations contained in contracts with customers to determine whether any of the performance obligations are distinct, such that the customers can benefit from the obligations on their own, and whether the obligations can be separately identifiable from other obligations in the contract.

For all of our contracts to date, the customer orders a specified quantity of a sequencing;

We have evaluated the performance obligations contained in contracts with customers to determine whether any of the performance obligations are distinct, such that the customers can benefit from the obligations on their own, and whether the obligations can be separately identifiable from other obligations in the contract.

For the significant majority of our contracts to date, the customer orders a specified quantity of a sequencing;

therefore, the delivery of the ordered quantity per the purchase order is accounted for as one performance obligation.

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The fixed prices identified in the arrangements only change if a pricing amendment is agreed with a customer.

In limited cases we provide our customers a discount if samples received are above a certain volume are purchased.

In limited cases we provide our customers a discount if samples received above a certain volume are purchased.

In such cases, the discount applies prospectively.

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We do not offer retrospective discounts or rebates.

Accordingly, all of

the transaction price, net of any discounts, is allocated to one performance obligation.

Therefore, upon delivery of the s ervices, there are no remaining performance obligations.

Accordingly, all of the transaction price, net of any discounts, is allocated to one performance obligation.

Therefore, upon delivery of the services, there are no remaining performance obligations.

Contracts that contain multiple distinct performance obligations would require an allocation of the transaction price to each performance obligation based on a relative stand-alone selling price basis.

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The primary purposes of our invoicing terms are to provide customers with simplified and predictable ways of purchasing our services and provide payment protection for us.

Convertible Preferred Stock Warrants

We accounted for warrants to purchase shares of our redeemable convertible preferred stock as liabilities at their estimated fair value because the warrants may have obligated us to transfer assets to the holders at a future date upon a deemed liquidation event.

The warrants were recorded at fair value upon issuance and were subject to remeasurement to fair value at each period end, with any fair value adjustments recognized in the consolidated statements of operations and comprehensive loss.

We adjusted the warrant liability for changes in fair value until the conversion of redeemable convertible preferred stock into common stock.

Common Stock Warrants

Our common stock warrants are classified as equity as they meet all criteria for equity classification.

The common stock warrants were recorded at fair value upon issuance, or conversion to common stock warrants in the case of our convertible preferred stock warrants, as additional paid-in-capital in the consolidated balance sheets.

The common stock warrants are not subsequently remeasured.

Convertible Instruments

We evaluate and account for conversion options embedded in convertible instruments in accordance with ASC Topic 815, Derivatives and Hedging Activities .

Applicable GAAP requires companies to bifurcate conversion options from their host instruments and account for them as freestanding derivative financial instruments according to certain criteria.

The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not remeasured at fair value under other GAAP with changes in fair value reported in earnings as they occur, and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.

Stock-Based Compensation

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Following our IPO, our board of directors determines the fair value of our common stock based on the closing quoted market price of our common stock on the date of grant.

We account for income taxes under the asset and liability method.

Deferred tax assets and liabilities are determined based on differences between the financial statement reporting and tax bases of assets and liabilities and net operating loss and credit carryforwards and are measured using the enacted tax rates and laws that will be in effect when such items are expected to reverse.

Deferred income tax assets are reduced, as necessary, by a valuation allowance when management determines it is more likely than not that some or all of the tax benefits will not be realized.

We assess all material positions taken in any income tax return, including all significant uncertain positions, in all tax years that are still subject to assessment or challenge by relevant taxing authorities.

Assessing an uncertain tax position begins with the initial determination of the position’s sustainability and is measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement.

We have elected to account for the tax on Global Intangible Low-Taxed Income, enacted as part of the Tax Cuts and Jobs Act as a component of tax expense in the period in which the tax is incurred.

JOBS Act Accounting Election

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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