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Item 1. Business

2022-02-24 compared with 2021-02-25 · 252 added, 132 removed, 413 unchanged (48% of the section changed)

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 only 50 to 500 genes.

Personalis’ strategy is to develop some of the world’s most advanced genetic tests for cancer.

Today our tests are routinely used by many of the largest oncology-focused pharmaceutical companies for analysis of patient samples from their clinical trials.

More recently, we have also begun to work with a growing number of leading cancer centers for clinical diagnostic use of our tests.

We believe that adoption and publication by these key opinion leaders will develop an advanced standard of care for cancer patients and eventual broad use in a community hospital setting.

We believe that our tests can meaningfully improve outcomes for cancer patients, and we estimate that the market opportunity for our tests for therapy selection and monitoring is approximately $30 billion in the U.S.

In December 2021, we launched NeXT Personal, a next-generation, tumor-informed liquid biopsy assay designed to detect and quantify minimal residual disease (“MRD”) and recurrence in patients previously diagnosed with cancer.

NeXT Personal is designed to deliver industry-leading MRD sensitivity down to the 1 part-per-million range, an approximately 10- to 100-fold improvement over other available technologies.

NeXT Personal leverages whole genome sequencing of a patient’s tumor to identify up to 1,800 specially-selected somatic variants that are subsequently used to create a personalized liquid biopsy panel for each patient.

We believe this enables earlier detection across a broader variety of cancers and stages, including typically challenging early stage, low mutational burden, and low-shedding cancers.

NeXT Personal is also designed to simultaneously detect and quantify clinically relevant mutations in circulating tumor-derived DNA (“ctDNA”) that may be used in the future to help guide therapy, when cancer is detected.

These include known targetable cancer mutations, drug resistance mutations, and new variants which can emerge and change over time, especially under therapeutic pressure.

We consider this approach not just “tumor-informed”, but “comprehensively tumor-informed”.

Our ultimate goal is not just to detect cancer, but to provide key information over the entire course of the patient’s disease.

We believe this can be better for patients, more informative for pharmaceutical customers, and a larger business opportunity for us.

Our strategy is to work with world-class medical institutions.

To that end, in the fourth quarter of 2021, we announced a collaboration with the Mayo Clinic and in the first quarter of 2022, we announced one with the Moores Cancer Center at UC San Diego Health.

In these collaborations, we provide clinical diagnostic testing and research sequencing and analysis services using our tissue-based NeXT Dx test.

We have begun to test clinical patient samples and are excited about the opportunity to work with these renowned cancer centers.

If we achieve a favorable reimbursement decision for our NeXT Dx test from the Molecular Diagnostic Services Program developed by Palmetto GBA (“MolDx”), we may also generate revenue in the future from some of these collaborations.

Given the advanced nature of our NeXT Dx test, we believe it is a good fit for high-end cancer centers, which have a dual mandate for both clinical care and research.

If these key opinion leaders have a positive experience using our tests, we are optimistic that this will also support broader use of our platform by other clinicians in the future.

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

We believe that capacity is already larger than 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, NeXT Dx Test and NeXT Personal offerings.

To date, we have sequenced more than 235,000 human samples, of which more than 145,000 were whole human genomes.

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.

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 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 deoxyribonucleic acid (“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.

Our headquarters – housing our Clinical Laboratory Improvement Amendments of 1988 (“CLIA”)-certified, College of American Pathologists (“CAP”)-accredited laboratory – is located in Menlo Park, CA.

The VA MVP is the largest population sequencing effort in the United States and we have delivered over 140,000 whole human genome sequence datasets to the VA MVP to date.

The cumulative value of task orders received from the VA MVP since inception is approximately $186 million, $178.1 million of which we had recognized as revenue as of December 31, 2021.

In September 2021, we received a task order from the VA MVP with a value of up to approximately $9.7 million, which was significantly less than in prior years.

At that time, we expected the reduced order amount was to be followed by a formal request for proposal (“RFP”) process and a potential new contract to be awarded sometime late in the third quarter of 2022.

However, recent discussions with our contacts at the VA MVP indicate that there will be no RFP process in 2022.

Accordingly, we do not expect to receive any new orders from the VA MVP this year nor to recognize any revenue from the VA MVP beyond the current order and contract.

Unless we receive an additional task order and/or enter into a new services agreement with the VA MVP with a value comparable to that of our current contract and historical contracted orders, our revenue from the VA MVP is expected to decline significantly in 2022 and future periods.

Given the strong growth we have already experienced in our oncology business in 2021, and the large market opportunity we see in this space, we plan to focus primarily on cancer as we go forward.

In August 2021, we announced that we will relocate our corporate headquarters from Menlo Park to a new facility in Fremont, California and we plan to beginning moving into it in the third quarter of this year.

We signed a 13.5-year lease for the 100,000 square foot facility, which is approximately double the amount of space in our current Menlo Park location.

The new facility is intended to allow for expansion of our laboratory for clinical testing to support biopharma customers and clinical diagnostic testing.

In addition, the new space is intended to support the expansion of research and development efforts to bring leading edge products and services to the marketplace.

The new facility will also provide more office space for our selling, general and administrative workforce.

Our current headquarters – housing our Clinical Laboratory Improvement Amendments of 1988 (“CLIA”)-certified, College of American Pathologists (“CAP”)-accredited laboratory – is located in Menlo Park, CA.

We were incorporated under the laws of the state of Delaware in February 2011 under the name Personalis, Inc.

Our customers include biopharmaceutical companies (including large pharmaceutical companies), universities, non-profits, and government entities such as the VA MVP.

Our customers include pharmaceutical companies, biopharmaceutical companies, universities, non-profits, and government entities.

The Genomics Engine for Next-Generation Cancer Therapies

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We generate and analyze data from patients who participated in clinical trials, which we believe will enable these customers to develop more effective therapies.

The information we generate is important to our customers developing three major classes of next-generation therapeutics:

immunotherapies, targeted therapies, and personalized cancer therapies.

The information we generate is important to our customers developing two major classes of next-generation therapeutics:

immunotherapies and targeted therapies.

Immunotherapies:

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We believe our company is positioned to become a leading provider of the complex information that we believe will continue to inform the development of targeted cancer therapies.

Personalized Cancer Therapies:

Many biopharmaceutical companies are pursuing personalized cancer therapies, which are designed and manufactured individually for each patient based on genomic alterations in a given patient’s tumor.

While there are many potential approaches to developing these therapies, including neoantigen-based vaccines and T-cell therapies, all of them could benefit from the data and analytics that our platform can generate about a patient’s tumor.

Many of our customers have leveraged our U.S.

Food and Drug Administration (the “FDA”) Device Master File as a component of their investigational new drug (“IND”) filings with the FDA.

If drugs that used our platform in the clinical trials to form the basis for approval are approved, we may be able to derive revenue in connection with the sale of these drugs.

We believe we are working with the majority of companies developing neoantigen-targeted personalized cancer therapies.

Genes that are involved in the mechanism of action of any of these drugs may develop mutations reducing or eliminating the effectiveness of those drugs.

These are called therapy resistance mutations.

In many cases they only become evident after extended treatment of the patient with the drug.

When these are detected, it can be an important signal that the patient may benefit from a change to another drug.

Thus, it is important not only to test for mutations when a patient is first diagnosed, but periodically to check for the emergence of these potential resistance mutations.

Unlike other tumor-informed liquid biopsy tests for MRD, our NeXT Personal liquid biopsy test was designed to look for the emergence of resistant mutations and to guide decisions about effective therapies for patients.

We anticipate that as the clinical utility of our platform is validated, we will have opportunities in connection with diagnostics and the commercialization of cancer therapeutics, which are significantly larger than our initial clinical-trial focused markets.

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Separately, we are also acquiring samples and building a database which we expect will hold value for our biopharmaceutical customers and may ultimately allow us to discover new mechanisms of cancer treatment.

Financial Highlights

Our revenues have grown rapidly as our penetration of clinical trials in advanced oncology therapeutics and our relationship with the VA MVP has expanded, consistent with our reputation as a leader in the field.

We generated revenues of $37.8 million, $65.2 million, and $78.6 million for the years ended December 31, 2018, 2019, and 2020, respectively.

We also incurred net losses of $19.9 million, $25.1 million, and $41.3 million for the years ended December 31, 2018, 2019, and 2020, respectively.

We have one reportable segment from the sale of sequencing and data analysis services and substantially all of our revenues to date have been derived from sales in the United States.

As of December 31, 2020, we had $203.3 million of cash and cash equivalents and short-term investments, an increase of $75.0 million from December 31, 2019.

Our revenues are primarily generated through sales of our services to the VA MVP and biopharmaceutical companies.

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

We raised $144.0 million and $117.5 million in our June 2019 initial public offering and August 2020 follow-on offering, respectively, net of underwriting discounts and commissions.

Subsequent to the fiscal period ended December 31, 2020 covered by this Annual Report on Form 10-K, on January 29, 2021, we completed a follow-on 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.

Market Opportunities

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Our genomic sequencing and analytics products are focused on the following customer applications:

biopharmaceutical company research, clinical and companion diagnostics, and population sequencing.

precision oncology, clinical and companion diagnostics, pharma research, and population genomics.

NeXT Platform

NeXT is the first platform to enable the comprehensive analysis of both a tumor and its microenvironment from a single sample.

Our NeXT Platform is a high-accuracy, clinical-grade, next-generation sequencing and analysis platform.

We have created an ecosystem of products and capabilities built on the NeXT Platform that synergize to drive value for our customers:

ImmunoID Next (comprehensive tumor profiling from tissue), NeXT Liquid Biopsy (comprehensive tumor profiling from plasma), 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 additional future 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).

ImmunoID Next (comprehensive tumor profiling from tissue), NeXT Liquid Biopsy (comprehensive tumor profiling from plasma), NeXT Personal (liquid biopsy offering for personalized tumor tracking for patients), 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 additional future product offerings, including NeXT CDx (diagnostic test) and NeXT Database (comprehensive tumor immune-genomics database).

Our NeXT Platform is designed to provide comprehensive analysis of both a tumor and its immune microenvironment, from a single limited tissue or plasma sample.

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Although we believe our cfDNA test will offer new insights, we believe it will be most useful for our biopharmaceutical customers alongside our primary tumor biopsy product, given that a tumor biopsy is required to analyze gene expression and elucidate tumor-infiltrating lymphocytes which are critical to understanding cancer’s interaction with the immune system.

NeXT Liquid Biopsy was launched in August 2020 and we have received several initial customer orders in 2020 with initial deliveries expected in 2021.

We are currently investing in the development of NeXT Personal, a liquid biopsy offering for personalized tumor tracking for patients.

An overview of key liquid biopsy capabilities follows.

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We also believe broader coverage will enable better neoantigen prediction, broader biomarker coverage, and higher potential to identify new drug targets.

ImmunoID NeXT tumor biopsy and NeXT liquid biopsy yields complementary data.

We believe that combining tumor biopsies with cfDNA can provide a more complete picture of the spectrum of mutations found in a cancer patient.

As an example of this, we compared the mutations found in eight late-stage colorectal tumor biopsy samples with those found in the plasma taken at the same time.

We found a range of overlap between tumor biopsy-identified sequence variations and the sequences generated using cfDNA.

These observations show that, while there was significant overlap between the tumor and liquid biopsy results, there were also mutations unique to tumor biopsy and vice versa (see examples of this in Figure 2).

This observation underscores the concept that tissue and liquid biopsies may be complementary, and when combined, may provide a more complete picture of the patient’s disease.

Overlap of sequence variations detected in matched tumor and blood plasma.

Numbers indicate variants detected in the tumor only, plasma only, or in both.

We anticipate that our liquid biopsy approach will have many applications, including monitoring of tumor response to therapy over many time points, detecting new genetic variants from evolution of the tumor under therapeutic pressure, detecting acquired mechanisms of resistance, and identifying neoantigens.

We anticipate that our exome-scale NeXT Liquid Biopsy approach will have many applications, including monitoring of tumor response to therapy over many time points, detecting new genetic variants from evolution of the tumor under therapeutic pressure, detecting acquired mechanisms of resistance, and identifying neoantigens.

NeXT Personal is an advanced, tumor-informed liquid biopsy assay developed to deliver industry-leading MRD sensitivity in the range of 1-3 parts per million, representing a 10- to 100-fold improvement over other available methods.

NeXT Personal is sample sparing, requiring only a single tube of blood, along with a tumor tissue sample.

The use of ctDNA as a predictive biomarker for MRD following treatment for solid tumors is rapidly being integrated into clinical trial design, translational research studies, and is on the verge of use in routine clinical care.

While detection methods for ctDNA have rapidly advanced, the limited sensitivity of these detection methods reduces its utility for diagnosing MRD across a variety of clinical applications.

Standard-of-care (“SOC”) radiological-based technologies, including CT, PET and MRI scans, also remain limited in their ability to detect residual disease during or after surgical or systemic therapy due to the minimum tumor volume required.

Therefore reliable, sensitive detection and quantification of MRD remains a key challenge, particularly in early-stage cancers, where timely detection of small micrometastatic lesions may enable treatment that prevents progression to advanced metastatic, incurable disease.

We believe that NeXT Personal addresses these challenges.

In the biopharma setting, MRD is rapidly emerging as a key biomarker in therapy development, whereby more sensitive detection and quantification of MRD may provide substantial benefits versus less sensitive methods through the reduction of false negative detection of cancer.

Our NeXT Dx Test is a comprehensive genomic cancer profiling test enabling advanced composite biomarkers for cancer treatment and provides a path from translational research to CDx on our NeXT Platform.

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NeXT Dx Test is one of the first cancer diagnostic platforms to profile approximately 20,000 genes in both the tumor exome and transcriptome, providing a comprehensive genomic testing solution that goes beyond many existing cancer diagnostic panels that focus on only a few hundred genes.

The NeXT Dx Test includes advanced analytics to provide a diagnostic report on genetic alterations in medically-important cancer genes, as well as emerging immunotherapy composite biomarkers of medical importance.

The NeXT Dx Test includes advanced analytics to provide a diagnostic report on genetic alterations in medically-important cancer genes, as well as emerging immunotherapy

composite biomarkers of medical importance.

Additionally, immunotherapy-related biomarkers such as microsatellite instability ( “ MSI ” ) status and tumor mutational burden ( “ TMB ” ) are included in the clinical report.

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This has required innovation on a number of fronts.

Revenues in connection with our NeXT Platform were minimal prior to our current fiscal year ended December 31, 2020.

In the current year ended December 31, 2020, revenues from our NeXT Platform accounted for approximately one-third of total revenues, excluding revenues from the VA MVP (discussed further below).

Revenue in connection with our NeXT Platform products has grown rapidly in recent years, accounting for only a minimal proportion of revenue prior to 2020 but now accounting for over two-thirds of revenue for the year ended December 31, 2021, excluding revenue from the VA MVP (discussed below).

The ACE Platform is the predecessor to our NeXT Platform.

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Our ACE Platform powers multiple products and services to our customers including:

ACE Extended Cancer Panel for DNA, ACE Extended Cancer Panel for RNA, ACE Cancer Research Exome, and ACE Cancer Research Transcriptome.

exome sequencing, transcriptome sequencing, and targeted cancer panels.

Our ACE technology provides coverage of difficult-to-sequence gene regions across all of the approximately 20,000 human genes, filling in key gaps left by other NGS approaches.

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We and others have shown in two publications that our ACE technology achieves superior gene sequencing coverage and finishing.

The substantial majority of our revenues since inception, excluding revenues from the VA MVP (discussed below) and our growing revenues from our NeXT Platform described above, were derived from ACE Extended Cancer Panel and Cancer Research services.

The substantial majority of our revenue since inception, excluding revenue from the VA MVP (discussed below) and our growing revenue from our NeXT Platform described above, were derived from ACE Platform products.

Whole Genome Sequencing

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The VA MVP began collecting samples in 2011 and is a landmark research effort aimed at better understanding how genetic variations affect health.

Up to two million veterans are expected to enroll in the VA MVP study.

With more than 825,000 enrollees to date, the VA MVP exceeds the enrollment numbers of any single VA study or research program in the past, and is in fact one of the largest population sequencing efforts in history.

In September 2017, we entered into a one-year contract with three one-year renewal option periods with the VA for the VA MVP, and received orders under this contract in September 2017, 2018, 2019, and 2020.

To date, we have been contracted to deliver approximately 147,000 genome sequence data sets to the VA MVP, and we expect revenue from the contracts awarded to date to continue into 2021.

The VA MVP is the largest population sequencing effort in the U.S.

In September 2017, we entered into a one-year contract with three one-year renewal option periods with the VA for the VA MVP, and received orders under this contract in September 2017, 2018, 2019,

2020 and 2021 .

To date, we have been contracted to deliver over 140 ,000 genome sequence data sets to the VA MVP.

This relationship with the VA MVP has enabled us to scale our operational infrastructure and achieve greater efficiencies in our lab.

It has also supported our development of industry-leading, large-scale cancer genomic testing.

The substantial experience that we have and expect to continue to develop in whole genome sequencing also optimally positions us for what we anticipate to be the longer-term strategic direction of the cancer genomics industry, which may include whole genome sequencing of tumors.

The VA MVP program has accounted for a substantial amount of our revenues in recent years, 71% of our total revenues in 2020, 67% in 2019, and 49% in 2018.

The substantial experience that we have developed in whole genome sequencing also optimally positions us for what we anticipate to be the longer-term strategic direction of the cancer genomics industry, which may include whole genome sequencing of tumors.

The VA MVP program has accounted for a substantial amount of our revenue in recent years, 53% in 2021, 71% in 2020, and 67% in 2019.

In September 2021, we received a task order from the VA MVP with a value of up to approximately $9.7 million, which was significantly less than in prior years.

At that time, we expected the reduced order amount was to be followed by a formal RFP process and a potential new contract to be awarded sometime late in the third quarter of 2022.

However, recent discussions with our contacts at the VA MVP indicate that there will be no RFP process in 2022.

Accordingly, we do not expect to receive any new orders from the VA MVP this year nor to recognize any revenue from the VA MVP beyond the current order and contract.

Personalis is Valuable to Biopharmaceutical Companies

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We believe our platform represents the next step in this transition by further enabling biopharmaceutical companies to address the historical limitations of analyzing patient tissue comprehensively.

The information we provide to personalized cancer therapy companies is used to design therapeutics .

Many biopharmaceutical companies are pursuing personalized cancer therapies, which are designed and manufactured, individually, for each patient based on genomic alterations in a given patient’s tumor.

While there are many potential approaches towards developing these therapies including neoantigen therapeutics, peptide-based vaccines, RNA and DNA vaccines, virally or bacterially encoded vaccines, and adoptive cell therapies, we believe all of them can benefit from the data and analytics that our platform can generate about a patient’s tumor.

We anticipate that drugs approved based on these therapeutic strategies may specify the use of our platform, enabling us to derive revenue in connection with the sale of commercial drugs, including the data generation and information processing required to treat each patient.

We believe we are working with the majority of companies developing neoantigen-targeted personalized cancer therapies.

Our enterprise-grade operational infrastructure is scalable, enables rapid turnaround times, and is tailored to meet the unique workflow needs of our customers.

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Our liquid biopsy assay is designed to monitor known neoantigens and detect novel neoantigens and tumor escape mechanisms that arise under therapeutic pressure.

Our mission is to transform the development of next-generation cancer therapies by providing more comprehensive molecular data about each patient’s tumor.

Our mission is to transform the development of next-generation cancer therapies by providing more comprehensive molecular data about each patient’s cancer and immune response.

To achieve this mission, our strategy is to:

Drive continued adoption of our NeXT Platform and population sequencing with both new and existing customers.

Continue to drive the adoption and expansion of our liquid biopsy offerings.

Continue to invest in our infrastructure and ramp up efforts to obtain clinical and regulatory approvals for our NeXT Platform.

Drive continued adoption of our NeXT Platform offerings—ImmunoID Next, NeXT Liquid Biopsy, NeXT Dx, and NeXT Personal—with existing and new customers.

Continue to enhance and display clinical utility of the NeXT Platform through collaborations.

Expand our facility capacity and operational footprint to support our future growth.

Expand Personalis’ footprint in China through our newly formed wholly owned subsidiary, Shanghai Personalis Biotechnology Co., Ltd., and develop relationships with the local scientific and regulatory community.

Invest in clinical, regulatory, and reimbursement infrastructure for NeXT Dx and NeXT Personal (MRD and ongoing patient management).

Focus our early diagnostic commercialization efforts on world-class cancer centers, which have a dual mandate for patient care and advanced clinical research.

Complete build-out of new facility in Fremont, California, which will expand our operational capacity and support future growth.

Expand footprint in China and develop relationships with the local scientific and regulatory community.

Our Proprietary Software and Robust Operational Infrastructure

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We have also recently begun efforts to commercialize our products in China.

In June 2020, we announced a partnership with a clinical genomics and life sciences company headquartered in China and our formation of a wholly owned subsidiary in Shanghai.

In 2020, we derived substantially all of our revenues from our customers in the United States.

In 2021, we derived 92% of our revenue from our customers in the United States.

Our sales representatives have extensive experience in enterprise/consultative selling in the genomics space.

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We anticipate that patients in clinical trials for cancer therapies will increasingly be tested pre-treatment and periodically afterwards to understand response to treatment in deep molecular detail, as their tumors evolve under therapeutic pressure.

Although the majority of our revenues come from single time point testing, we believe our revenues from multiple time point testing will continue to grow.

We also derive revenues from analysis of multiple customer samples from the same patient and time point to assess genetic

differences between the primary tumor and metastases.

Although the majority of our revenue comes from single time point testing, we believe our revenue from multiple time-point testing will continue to grow.

We also derive revenue from analysis of multiple customer samples from the same patient and time point to assess genetic differences between the primary tumor and metastases.

Given the value of comprehensive genomic information from multiple time points or samples, we anticipate that our revenue, and the available market, will continue to grow.

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Our cancer genomic services are sold primarily to pharmaceutical companies, biopharmaceutical companies, biotechnology companies, universities, non-profits, and government entities, while services for population sequencing initiatives are sold primarily to the VA MVP, which is a government entity.

Our customers include a majority of the top ten oncology-focused pharmaceutical companies, as measured by annual revenues.

As of the end of our fiscal year ended December 31, 2020, 45 customers have placed orders for our NeXT Platform products.

In 2020, VA MVP accounted for 71% of our revenues.

No other customer accounted for 10% or more of our revenues.

In 2019, we had two customers account for 10% or more of our revenues:

Our customers include a majority of the top ten oncology-focused pharmaceutical companies, as measured by annual revenue.

In 2021, we had two customers account for 10% or more of our revenue:

VA MVP at 53% and Natera, Inc.

(“Natera”) at 10%.

In 2020, VA MVP accounted for 71% of our revenue and no other customer accounted for 10% or more.

In 2019, we had two customers account for 10% or more of our revenue:

VA MVP at 67% and Pfizer Inc.

In 2018, we had three customers account for 10% or more of our revenues:

VA MVP at 49%, Merck & Co., Inc.

at 12%, and Pfizer Inc.

Our Competition

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These companies offer services that implement various technological approaches including next-generation sequencing and microarray analyses.

Some of our present or potential competitors include Adaptive Biotechnologies Corporation, C2i Genomics, Inc., Caris Life Sciences, Inc., Covance Inc., which was acquired by Laboratory Corporation of America Holdings in February 2015, Foundation Medicine, Inc., which was acquired by Roche Holdings, Inc.

in July 2018, Freenome, Inc., Genosity, Inc., Guardant Health, Inc., Inivata Limited, Invitae Corporation, Mount Sinai Genomics, Inc.

which does business under the name Sema4, Natera, Inc., NanoString Technologies, Inc., NeoGenomics, Inc., Personal Genome Diagnostics, Inc., Roche Molecular Systems, Inc., and Tempus, Inc.

Some of our present or potential competitors include Adaptive Biotechnologies Corporation, Adela, Inc., ArcherDx, Inc., which was acquired by Invitae Corporation in October 2020, C2i Genomics, Inc., Caris Life Sciences, Inc., Covance Inc., which was acquired by Laboratory Corporation of America Holdings in February 2015, Foundation Medicine, Inc., which was acquired by Roche Holdings, Inc.

in July 2018, Freenome, Inc., Geneseeq Technology Inc., Genosity, Inc., which was acquired by Invitae Corporation in April 2021, GRAIL, Inc.

(“GRAIL”), which Illumina announced that it had acquired in August 2021, Guardant Health, Inc., Inivata Limited, which was acquired by NeoGenomics, Inc.

in June 2021, Invitae Corporation, Mount Sinai Genomics, Inc.

which does business under the name Sema4, Natera, NanoString Technologies, Inc., NeoGenomics, Inc., Personal Genome Diagnostics, Inc., Predicine, Inc., Roche Molecular Systems, Inc., and Tempus, Inc.

Additionally, several companies develop next-generation sequencing platforms that can be used for genomic profiling for biopharmaceutical research and development applications.

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We seek to protect our investments made into the development of our technology by relying on a combination of patents, trademarks, copyrights, trade secrets, know-how, confidentiality agreements and procedures, non-disclosure agreements with third parties, employee disclosure and invention assignment agreements, and other contractual rights.

Our patent strategy is focused on seeking coverage for our core technology, our ACE assay, and specific follow-on applications and implementations for enhancing sequencing coverage of certain genomic regions and analyzing cell-free nucleic acids.

Our patent strategy is focused on seeking coverage for our core technology, our NeXT Platform, including applications and implementations for enhancing sequencing coverage of certain genomic regions, analyzing cell-free nucleic acids, and creating personalized cancer recurrence detection assays.

In addition, we file for patent protection on our ongoing research and development, particularly other novel assay technologies which may be applicable in cancer cases and other diseases.

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personalized genetic testing assays, including claims directed to methods for using sequencing data to create a personalized genetic test to monitor cancer progression, or the recurrence of disease.

As of December 31, 2020, we own thirteen issued U.S.

and foreign patents in China and the United Kingdom and several pending U.S.

As of December 31, 2021, we own sixteen issued U.S.

and foreign patents in China, the European Union, and the United Kingdom and several pending U.S.

and foreign patent applications.

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Government Regulations

Coverage and Reimbursement

Our ability, and the ability of our customers, to commercialize diagnostic tests based on our technology will depend in part on the extent to which coverage and reimbursement for these tests will be available from third-party payors.

Coverage and reimbursement of new products and services is uncertain, and whether the companies that use our instruments to develop their own products or services will attain coverage and adequate reimbursement is unknown.

In the U.S., there is no uniform policy for determining coverage and reimbursement.

Coverage can differ from payor to payor, and the process for determining whether a payor will provide coverage may be separate from the process for setting the reimbursement rate.

In addition, the U.S.

government, state legislatures and foreign governments have shown significant interest in implementing cost containment programs to limit the growth of government-paid healthcare costs, including price controls and restrictions on reimbursement.

Additionally, the coverage and reimbursement status of newly approved or cleared laboratory tests, including our NeXT Dx test, is uncertain.

If we decide to seek reimbursement for our NeXT Dx test or other in vitro diagnostic tests we may develop, and if such tests are inadequately covered by insurance or ineligible for such reimbursement, this could limit our ability to market any such future tests.

The commercial success of future products in both domestic and international markets may depend in part on the availability of coverage and adequate reimbursement from third-party payors, including government payors, such as the Medicare and Medicaid programs, managed care organizations, and other third-party payors.

Federal and State Laboratory Licensing Requirements

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Pursuant to its authority under the Federal Food, Drug and Cosmetic Act (the “FDC Act”), the FDA has jurisdiction over medical devices, which are defined to include, among other things, in vitro diagnostic devices (“IVDs”).

The FDA regulates, among other things, the research, design, development, pre-clinical and clinical testing, manufacturing, safety, effectiveness, packaging, labeling, storage, recordkeeping, pre-market clearance or approval, adverse event reporting, marketing, promotion, sales, distribution, and import and export of medical devices.

Unless an exemption applies, each new or significantly modified medical device we seek to commercially distribute in the United States will require either a premarket notification to the FDA requesting permission for commercial distribution under Section 510(k) of the FDC Act, also referred to as a 510(k) clearance, or approval from the FDA of a PMA.

The FDA regulates, among

other things, the research, design, development, pre-clinical and clinical testing, manufacturing, safety, effectiveness, packaging, labeling, storage, recordkeeping, pre-market clearance or approval, adverse event reporting, marketing, promotion, sales, distribution, and import and export of medical devices.

Both the 510(k) clearance and PMA processes can be resource intensive, expensive, and lengthy, and require payment of significant user fees.

Although the FDA regulates medical devices, including IVDs, the FDA has historically exercised its enforcement discretion and not enforced applicable provisions of the FDC Act and FDA regulations with respect to LDTs, which are a subset of IVDs that are intended for clinical use and developed, validated, and offered within a single laboratory for use only in that laboratory.

We market our diagnostic test based on the NeXT Platform as an LDT.

We currently market our diagnostic test based on the NeXT Platform as an LDT.

As a result, we believe our diagnostic services are not currently subject to the FDA’s enforcement of its medical device regulations and the applicable FDC Act provisions.

Despite the FDA’s historic enforcement discretion policy with respect to LDTs, if the FDA determines that our tests are subject to enforcement as medical devices, we could be subject to administrative and judicial sanctions, and additional regulatory controls and submissions for our tests, all of which could be burdensome.

We and/or our collaborators may also voluntarily submit one or more of our tests for premarket notification, review, clearance or approval by the FDA as medical devices, which may be as companion diagnostic medical devices.

If the FDA determines that our tests and associated software do not fall within the definition of an LDT, or there are regulatory or legislative changes, or if we voluntarily submit one or more of our tests for premarket notification, review, clearance or approval by the FDA as medical devices, we may be required to obtain premarket clearance for our tests and associated software under Section 510(k) of the FDC Act or approval of a PMA.

We would also be subject to ongoing regulatory requirements such as registration and listing requirements, medical device reporting requirements, and quality control requirements.

If our tests are considered medical devices not subject to enforcement discretion, or if we voluntarily submit one or more of our tests for premarket notification, review, clearance or approval by the FDA as medical devices, the regulatory requirements to which our tests are subject would depend on the FDA’s classification of our tests.

The FDA has issued regulations classifying medical devices into one of three regulatory control categories (Class I, Class II, or Class III) depending on the degree of regulation that the FDA finds necessary to provide reasonable assurance of their safety and effectiveness.

The class into which a device is placed determines the requirements that a medical device manufacturer must meet both pre- and post-market.

Generally, Class I devices do not require premarket authorization, but are subject to a comprehensive set of regulatory authorities referred to as general controls.

Class II devices, in addition to general controls, generally require special controls and premarket clearance through the submission of a section 510(k) premarket notification.

Class III devices are subject to general controls and special controls, and also require premarket approval prior to commercial distribution, which is a more rigorous process than premarket clearance.

Under the FDC Act, a device that is first marketed after May 28, 1976 is by default a Class III device requiring premarket approval unless it is within a type of generic device class that has been classified as Class I or Class II.

Even if a device falls under an existing Class II, non-exempt, device classification, the product must also be shown to be “substantially equivalent” to a legally marketed predicate device through submission of a section 510(k) premarket notification.

If after reviewing a firm’s 510(k) premarket notification, the FDA determines that a device is not substantially equivalent to a legally marketed predicate device, the new device is classified into Class III, requiring premarket approval.

It is possible for a manufacturer to obtain a Class I or Class II designation without an appropriate predicate by submitting a de novo request for reclassification.

The process for submitting a 510(k) premarket notification and receiving FDA clearance usually takes from three to 12 months, but it can take significantly longer and clearance is never guaranteed.

The process for submitting and obtaining FDA approval of a PMA is much more costly, lengthy, and uncertain.

It generally takes from one to three years or even longer and approval is not guaranteed.

PMA approval typically requires extensive clinical data and can be significantly longer, more expensive and more uncertain than the 510(k) clearance process.

Despite the time, effort and expense expended, there can be no assurance that a particular device ultimately will be cleared or approved by the FDA through either the 510(k) clearance process or the PMA process on a timely basis, or at all.

If our tests are considered medical devices not subject to enforcement discretion, or if we voluntarily submit one or more of our tests for premarket notification, review, clearance or approval by the FDA as medical devices, one classification regulation that could be relevant to one or more of our tests is a classification for genetic health risk (“GHR”) assessment tests, codified at 21 C.F.R.

If our tests are considered medical devices that are not subject to enforcement discretion, or if we voluntarily submit one or more of our tests for premarket notification, review, clearance or approval by the FDA as medical devices, and one or more of our tests is considered to fall under the 21 C.F.R.

§ 866.5950 classification regulation for GHR tests, or under another Class II classification that is subject to a premarket notification requirement, we would be required to obtain marketing clearance for such tests.

Further, if considered to fall under the 21 C.F.R.

§ 866.5950 classification for GHR tests, our tests would be required to adhere to specified special controls, such as labeling and testing specifications and information about the test to be posted on the manufacturer’s website.

The FDA requires medical device manufacturers to comply with, among other things, current good manufacturing practices for medical devices, set forth in the Quality System Regulation at 21 C.F.R.

Part 820, which requires manufacturers to follow elaborate design, testing, control, documentation, and other quality assurance procedures during the manufacturing process;

the medical device reporting regulation, which requires that manufacturers report to the FDA if their device or a similar device they market may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if it were to recur;

labeling regulations, including the FDA’s general prohibition against promoting products for unapproved or “off-label” uses;

the reports of corrections and removals regulation, which requires manufacturers to report to the FDA if a device correction or removal was initiated to reduce a risk to health posed by the device or to remedy a violation of the FDC Act caused by the device which may present a risk to health;

and the establishment registration and device listing regulation.

In addition, any clearance or approval we obtain for our products may contain requirements for costly post-market testing and surveillance to monitor the safety or efficacy of the product.

The FDA has broad post-market enforcement powers, and if unanticipated problems with our products arise, or if we or our suppliers fail to comply with regulatory requirements following FDA clearance or approval, we may become subject to enforcement actions such as:

restrictions on manufacturing processes;

restrictions on product marketing;

warning letters;

withdrawal or recall of products from the market;

refusal to approve pending PMAs, 510(k)s, or supplements to approved PMAs or cleared 510(k)s that we submit;

fines, restitution, or disgorgement of profits or revenue;

suspension or withdrawal of regulatory clearances or approvals;

limitation on, or refusal to permit, import or export of our products;

product seizures;

imposition of civil or criminal penalties.

Moreover, the FDA strictly regulates the promotional claims that may be made about medical devices.

In particular, a medical device may not be promoted for uses that are not approved by the FDA as reflected in the device’s approved labeling.

However, companies may share truthful and not misleading information that is otherwise consistent with the product’s FDA approved labeling.

The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to significant civil, criminal, and administrative penalties.

In addition, many of the products we use to perform our tests, including sequencers and various associated reagents supplied to us by Illumina, are labeled as research use only (“RUO”) in the U.S.

RUO products are exempt from FDA medical device requirements provided their manufacturers comply with specified labeling and restrictions on distribution.

The products must bear the statement:

“For Research Use Only.

Not for Use in Diagnostic Procedures.” Manufacturers of RUO products cannot make any claims related to safety, effectiveness or diagnostic utility, and RUO products cannot be intended by the manufacturer for clinical diagnostic use.

A product promoted for diagnostic use may be viewed by the FDA as adulterated and misbranded under the FDC Act and is subject to FDA enforcement activities, including requiring the manufacturer to seek marketing authorization for the products.

We currently use Illumina and other RUO products for our clinical diagnostic tests.

If the FDA were to require clearance, approval or authorization for the sale of Illumina’s RUO products and if Illumina does not obtain such clearance, approval or authorization, we would have to find an alternative sequencing platform for some or all of our clinical diagnostic tests.

Federal and State Fraud and Abuse Laws

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The Stark Law and similar state laws, including California’s Physician Ownership and Referral Act, generally prohibit, among other things, clinical laboratories and other entities from billing a patient or any governmental or commercial payer for any diagnostic services when the physician ordering the service, or any member of such physician’s immediate family, has a direct or indirect investment interest in or compensation arrangement with us, unless the arrangement meets an exception to the prohibition.

Other federal fraud and abuse laws to which we are subject include, but are not limited to, the federal civil and criminal false claims laws including the FCA, which imposes liability on any person or entity that, among other things, knowingly presents, or causes to be presented, a false or fraudulent claim for payment to the federal government, and the federal Civil Monetary Penalties Law, which prohibits, among other things, the offering or transfer of remuneration to a Medicare or state healthcare program beneficiary if the person knows or should know it is likely to influence the beneficiary’s selection of a particular provider, practitioner, or supplier of services reimbursable by Medicare or a state healthcare program, unless an exception applies.

The federal civil and criminal false claims laws including the FCA, which imposes liability on any person or entity that, among other things, knowingly presents, or causes to be presented, a false or fraudulent claim for payment to the federal government, and the federal Civil Monetary Penalties Law, which prohibits, among other things, the offering or transfer of remuneration to a Medicare or state healthcare program beneficiary if the person knows or should know it is likely to influence the beneficiary’s selection of a particular provider, practitioner, or supplier of services reimbursable by Medicare or a state healthcare program, unless an exception applies.

Under the FCA, private citizens can bring claims on behalf of the government through qui tam actions.

We must also operate within the bounds of the fraud and abuse laws of the states in which we do business which may apply to items or services reimbursed by non-governmental third-party payers, including private insurers.

The Eliminating Kickbacks in Recovery Act

The Eliminating Kickbacks in Recovery Act of 2018 (“EKRA”) prohibits payments for referrals to recovery homes, clinical treatment facilities, and laboratories and is similar to the federal Anti-Kickback Statute in that it creates criminal penalties for knowing or willful payment or offer, or solicitation or receipt, of any remuneration, whether directly or indirectly, overtly or covertly, in cash or in kind, in exchange for the referral or inducement of laboratory testing unless a specific exception applies.

Unlike the federal Anti-Kickback

Statute, EKRA’s reach extends beyond federal health care programs to include private insurance (i.e., it is an “all payer” statute).

Additionally, most of the safe harbors available under the federal Anti-Kickback Statute are not reiterated under EKRA, and certain EKRA safe harbors conflict with the safe harbors available under the federal Anti-Kickback Statute.

Therefore, compliance with a federal Anti-Kickback safe harbor does not guarantee protection under EKRA.

Because EKRA is a new law, there is very little additional guidance to indicate how and to what extent it will be interpreted, applied and enforced by the government.

Currently, there is no proposed regulation interpreting or implementing EKRA, nor any public guidance released by a federal agency concerning EKRA.

Other Federal and State Healthcare Laws

In addition to the requirements discussed above, several other healthcare laws could have an effect on our business.

For example, the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) fraud and abuse provisions created federal civil and criminal statutes that prohibit, among other things, defrauding healthcare programs, willfully obstructing a criminal investigation of a healthcare offense, and falsifying or concealing a material fact or making any materially false statements in connection with the payment for healthcare benefits, items or services.

Similar to the federal Anti- Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation.

The federal Physician Payments Sunshine Act requires certain manufacturers of drugs, biologicals, and medical devices or supplies that require premarket approval by or notification to the FDA, and for which payment is available under Medicare, Medicaid, or the Children’s Health Insurance Program (“CHIP”), with certain exceptions, to report annually to CMS information related to (i) payments and other transfers of value to physicians (defined to include doctors, dentists, optometrists, podiatrists, and chiropractors), other healthcare professionals (such as physicians assistants and nurse practitioners) and teaching hospitals, and (ii) ownership and investment interests held by physicians and their immediate family members.

The “Anti-Markup Rule” and similar state laws prohibit, among other things, a physician or supplier billing the Medicare program from marking up the price of a purchased diagnostic service performed by another laboratory or supplier that does not “share a practice” with the billing physician or supplier.

Penalties may apply to the billing physician or supplier if Medicare or another payer is billed at a rate that exceeds the performing laboratory’s charges to the billing physician or supplier, and the performing laboratory could be at risk under false claims laws, described below, for causing the submission of a false claim.

State client billing laws specify whether a person that did not perform the service is permitted to submit the claim for payment and if so, whether the non-performing person is permitted to mark up the cost of the services in excess of the price the purchasing provider paid for such services.

For example, California has an anti-markup statute which prohibits providers from charging for any laboratory test that it did not perform unless the provider (a) notifies the patient, client or customer of the name, address, and charges of the laboratory performing the test, and (b) charges no more than what the provider was charged by the clinical laboratory which performed the test except for any other service actually rendered to the patient by the provider (for example, specimen collection, processing and handling) (California Business and Professions Code Section 655.5).

This provision applies, with certain limited exceptions, to licensed persons such as physicians and clinical laboratories regulated under the Business and Professions Code.

In addition, many states also have “direct-bill” laws, which means that the services actually performed by an individual or entity must be billed by such individual or entity, thus preventing ordering physicians from purchasing services from a laboratory and rebilling for the services they order.

For example, California has a direct bill rule specific to anatomic pathology services that prohibits any provider from billing for anatomic pathology services if those services were not actually rendered by that person or under his or her direct supervision with some exemptions (California Business and Professions Code Section 655.7).

In addition, we may be subject to state laws that prohibit other specified practices, such as billing physicians for testing that they order;

waiving coinsurance, copayments, deductibles, and other amounts owed by patients;

billing a state Medicaid program at a price that is higher than what is charged to one or more other payors;

employing, exercising control over, licensed professionals in violation of state laws prohibiting corporate practice of medicine and other professions, and prohibitions against the splitting of professional fees with licensed professionals.

As a clinical laboratory, our business practices may face additional scrutiny from government regulatory agencies such as the Department of Justice, the HHS Office of Inspector General (the “OIG”), and CMS.

Certain arrangements between clinical laboratories and referring physicians have been identified in fraud alerts issued by the OIG as implicating the Anti-Kickback Statute.

Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs.

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HIPAA and HITECH

Under the administrative simplification provisions of the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), as amended by the Health Information Technology for Economic and Clinical Health Act (“HITECH”), the U.S.

Under the administrative simplification provisions of HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act (“HITECH”), the U.S.

Department of Health and Human Services (“HHS”) issued regulations that establish uniform standards governing the conduct of certain electronic healthcare transactions and requirements for protecting the privacy and security of protected health information (“PHI”), used or disclosed by covered entities and business associates.

Covered entities and business associates are subject to HIPAA and HITECH.

Covered entities and

business associates are subject to HIPAA and HITECH.

Our subcontractors that create, receive, maintain, transmit, or otherwise process PHI on behalf of us are HIPAA “business associates” and must also comply with HIPAA as a business associate.

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The ACA contained a number of provisions expected to impact the clinical laboratory industry, such as changes governing enrollment in state and federal health care programs, reimbursement changes, and fraud and abuse.

Some of the provisions of the ACA have yet to be implemented, and there have been judicial and Congressional challenges to certain aspects of the ACA, as well as recent efforts by the former Trump administration to repeal or replace certain aspects of the ACA.

There have been executive, judicial and Congressional challenges to certain aspects of the ACA.

Since January 2017, former President Trump signed two executive orders and other directives designed to delay the implementation of certain provisions of the ACA.

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While Congress has not passed comprehensive repeal legislation, it has enacted laws that modify certain provisions of the ACA such as removing penalties, starting January 1, 2019, for not complying with the ACA’s individual mandate to carry health insurance and delaying the implementation of certain ACA-mandated fees.

On December 14, 2018, a Texas U.S.

District Court Judge ruled that the ACA is unconstitutional in its entirety because the “individual mandate” was repealed by Congress as part of the Tax Cuts and Jobs Act of 2017.

While the Texas U.S.

District Court Judge, as well as the Trump administration and CMS, stated that the ruling will have no immediate effect pending appeal of the decision, it is unclear how this decision, subsequent appeals, and other efforts to repeal and replace the ACA will impact the ACA.

We anticipate there will continue to be proposals by legislators at both the federal and state levels, regulators and commercial payers to reduce costs while expanding individual healthcare benefits.

On June 17, 2021 the U.S.

Supreme Court dismissed a challenge on procedural grounds that argued the ACA is unconstitutional in its entirety because the “individual mandate” was repealed by Congress.

Thus, the ACA will remain in effect in its current form.

Further, prior to the U.S.

Supreme Court ruling, on January 28, 2021, President Biden issued an executive order that initiated a special enrollment period for purposes of obtaining health insurance coverage through the ACA marketplace The executive order also instructed certain governmental agencies to review and reconsider their existing policies and rules that limit access to healthcare, including among others, reexamining Medicaid demonstration projects and waiver programs that include work requirements, and policies that create unnecessary barriers to obtaining access to health insurance coverage through Medicaid or the ACA.

It is possible that the ACA will be subject to judicial or Congressional challenges in the future.

In addition, Congress and the Biden administration are considering other health reform initiatives, such as the Build Back Better Plan.

It is unclear how any such challenges and the health reform measures of the Biden administration will impact the ACA.

Other legislative changes have been proposed and adopted since the ACA was enacted.

On August 2, 2011, the Budget Control Act of 2011 was signed into law, which, among other things, reduced Medicare payments to providers by 2% per fiscal year, effective on April 1, 2013 and, due to subsequent legislative amendments to the statute, will remain in effect through 2031, with the exception of a temporary suspension from May 1, 2020 through March 31, 2022, unless additional Congressional action is taken.

Under current legislation, the actual reduction in Medicare payments will vary from 1% in 2022 to up to 3% in the final fiscal year of this sequester.

On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law, which, among other things, reduced Medicare payments to several providers, including hospitals, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years.

The Medicare Access and CHIP Reauthorization Act of 2015, enacted on April 16, 2015 (“MACRA”), repealed the formula by which Medicare made annual payment adjustments to physicians and replaced the former formula with fixed annual updates, and established a quality payment incentive program, also referred to as the Quality Payment Program.

This program provides clinicians with two ways to participate, including through the Advanced Alternative Payment Models (“APMs”), and the Merit-based Incentive Payment System (“MIPS”).

In November 2019, CMS issued a final rule finalizing the changes to the Quality Payment Program.

At this time, it is unclear how the introduction of the Quality Payment Program will impact overall physician reimbursement under the Medicare program.

Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payors.

In April 2014, Congress passed the Protecting Access to Medicare Act of 2014 (“PAMA”), which included substantial changes to the way in which clinical laboratory services are paid under Medicare.

Under PAMA, laboratories that receive the majority of their Medicare revenue from payments made under the Medicare Clinical Laboratory Fee Schedule, or the Physician Fee Schedule are required to report to CMS, beginning in 2017 and every three years thereafter (or annually for “advanced diagnostic laboratory tests”),

private payer payment rates and volumes for their tests.

CMS will use this data to calculate a weighted median payment rate for each test, which will be used to establish revised Medicare reimbursement rates for the tests.

Laboratories that fail to report the required payment information may be subject to substantial civil monetary penalties.

Reporting of payment data under PAMA for clinical diagnostic laboratory tests has been delayed on numerous occasions.

Based on current law, between January 1, 2023 and March 31, 2023, applicable laboratories will be required to report on data collected during January 1, 2019 and June 30, 2019.

This data will be utilized to determine 2024 to 2026 CLFS rates.

The payment rate applies to laboratory tests furnished by a hospital laboratory if the test is separately paid under the hospital outpatient prospective payment system.

It is still too early to predict the full impact on reimbursement for our current tests or those in development.

In addition, CMS updated the statutory phase-in provisions such that the rates for clinical diagnostic laboratory tests in 2020 could not be reduced by more than 10% of the rates for 2019.

Pursuant to the CARES Act, the statutory phase-in of the payment reductions has been extended through 2024 with a 0% reduction cap for 2021-2022 and a 15% reduction cap for 2023 through 2025.

It is unclear what impact new quality and payment programs, such as MACRA, or new pricing structures, such as those adopted under PAMA, may have on our business, financial condition, results of operations, or cash flows.

We also anticipate there will continue to be proposals by legislators at both the federal and state levels, regulators and private payers to reduce costs while expanding individual healthcare benefits.

Certain of these changes could impose additional limitations on the prices we will be able to charge for our tests, the coverage of or the amounts of reimbursement available for our tests from payers, including commercial payers and government payers.

Further, it is possible that additional governmental action is taken to address the COVID-19 pandemic.

Material Agreements

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On September 28, 2017, we entered into a contract with the VA for the VA MVP to provide them with a combination of whole genome sequencing services (the “VA MVP Agreement”).

The performance period for the services includes a base period of one year (September 2017 through August 2018), with three one-year renewal option periods that may be exercised upon discretion of the VA MVP (September 2018 through August 2019;

September 2019 through August 2020;

and September 2020 through August 2021).

Each task order issued against the VA MVP Agreement has a separate period of performance and is subject to the terms and conditions of the VA MVP Agreement.

Funds are obligated by the VA MVP under each task order based on actual needs.

To date, the VA MVP has exercised all of its three one-year renewal options, meaning that the VA MVP Agreement expires at the end of August 2021 and there are no remaining renewal options.

Our current task order extends through August 2021.

In order for us to provide additional services to the VA MVP after August 2021, we would need to receive an additional task order before the VA MVP Agreement expires in September 2021, or enter into a new services agreement with the VA MVP.

We received contracted orders from the VA MVP in September 2017, 2018, 2019, 2020, and 2021.

The current contract does not include a renewal option.

For us to provide additional services to the VA MVP after completion of the current contract, we would need to receive an additional task order and/or enter into a new services agreement with the VA MVP, neither of which had occurred as of the date of filing this Annual Report.

All materials and samples utilized during the course of the VA MVP Agreement and all data first produced or delivered under the VA MVP Agreement are the sole property of the VA MVP.

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If it is determined that the VA MVP improperly terminated this contract for default, such termination shall be deemed a termination for convenience.

In September 2021, we received a task order from the VA MVP with a value of up to approximately $9.7 million, which was significantly less than in prior years.

At that time, we expected the reduced order amount was to be followed by a formal RFP process and a potential new contract to be awarded sometime late in the third quarter of 2022.

However, recent discussions with our contacts at the VA MVP indicate that there will be no RFP process in 2022.

Accordingly, we are not planning on receiving any new orders from the VA MVP this year or expecting to recognize any revenue from the VA MVP beyond the current order and contract.

Agreements with Illumina

On March 1, 2019, we received a quotation for supply of genetic analysis products (the “Quote”) from Illumina.

The Quote provided information as to the cost of five NovaSeq TM 6000 Sequencing System instruments.

The term of the Quote extended through March 31, 2019.

On March 20, 2019, we submitted a purchase order to Illumina for five NovaSeq TM 6000 Sequencing System instruments, four of which we have received and one of which will be received on or before the due date of March 23, 2023.

On November 1, 2017, we entered into a master services subcontract agreement (the “Subcontract Agreement”) with Illumina.

Under the terms of the Subcontract Agreement, we engaged Illumina as our subcontractor to perform certain genotyping services (the “Services”) on our behalf pursuant to written purchase orders in fulfillment of our VA MVP Agreement.

The price for Illumina’s Services set forth in the Subcontract Agreement is effective through December 31, 2021, or later if the VA MVP Agreement is extended.

The Subcontract Agreement extends through the last day of the VA MVP Agreement, currently August 2021 but as may be extended, unless it is otherwise terminated early pursuant to its terms.

The price for Illumina’s Services set forth in the Subcontract Agreement is effective through March 2022, or later if the VA MVP Agreement is extended.

The Subcontract Agreement extends through the last day of the VA MVP Agreement, currently March 2022 but as may be extended, unless it is otherwise terminated early pursuant to its terms.

All or part of the Subcontract Agreement may be terminated at our convenience in the event that the VA MVP terminates the VA MVP Agreement or terminates the part of the VA MVP Agreement that affects the Services provided by Illumina.

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On March 26, 2019, we entered into a pricing agreement with Illumina, which provides pricing terms for the NovaSeq™ 5000/6000 S4 Reagent Kit (each, a “Kit”).

The pricing agreement had a purchase commitment of $1.7 million by June 30, 2019 to purchase these Kits, which we fulfilled in the ordinary course of business.

The pricing agreement had a purchase commitment of $1.7 million by June 30, 2019 to

purchase these Kits, which we fulfilled in the ordinary course of business.

The term of the pricing agreement extends through December 31, 2022.

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Dedication to discovery and innovation

We understand that our future depends upon the attraction, retention, and engagement of a talented, diverse, and committed team that can thrive and innovate in a supportive and safe environment.

Our efforts to ensure this occurs across the enterprise include offering competitive total rewards programs, ongoing training and development, commitment to the safety and health of our employees, and support for our employees during the unprecedented global circumstances that began in 2020.

Many of our insights and adaptations during 2020 related to the hiring and support of our employees are expected to be continued through 2021.

These include additional outreach and enhanced communication by our leadership and employees at multiple levels and support for more flexible work plans.

At a foundational level, employees receive training related to workplace safety and emergency preparedness, awareness and expectations of inclusion and diversity, required data protection, and other regulatory matters.

Our Diversity Committee identifies learnings employees can benefit from including insights from employees with different backgrounds and opportunities to actively contribute at work and in our communities to support diversity and inclusiveness.

As an example, we have made visible the contributions of various groups to the science that informs our work at Personalis.

We believe engagement and retention is especially critical at Personalis given the complex and highly technical nature of our work.

Successfully onboarding new employees involves a significant commitment from managers and fellow employees.

Retaining newly hired team members is also critical given the relatively small number of applicants who meet our requirements and the competitive market for such talent.

Our approach involves ongoing internal and external reviews and benchmarking of the competitiveness of our offerings, including in the following areas:

cash and equity compensation, benefits, workplace flexibility, and career growth and development opportunities.

As a company with significant growth plans, we expect to continue not only with our current efforts, but to broaden them with input from employees and managers, as well as comparisons with others in our industries and other sectors.

As of December 31, 2020, we had 235 employees, 234 of whom were full-time employees.

We offer competitive total rewards programs, ongoing training and development, and a commitment to the safety and health of our employees.

We also practice a commitment to diversity by including broader outreach and sourcing for candidates for new roles as well as education and a visible commitment to diversity and inclusion internally.

For example, we established a Diversity Committee in 2020 with its mission to promote a sense of belonging for all our employees.

An engaged workforce with skills specific to our needs is critical for our successful growth in a competitive market and sector.

We regularly benchmark our compensation and benefits by geography, industry (life sciences), and by role to ensure we maintain our status as an employer of choice in these areas.

Our turnover rates over the last three years have been consistent with such benchmarks.

Reports of our position relative to the benchmarks are reported to management and the compensation committee of our board of directors on a periodic basis.

As of December 31, 2021, we had 326 employees, of which 325 were full-time employees.

Of these full-time employees, 149 were in research and development, 74 in laboratory operations, 55 in commercial operations and 47 in general and administrative functions.

At this time, 227 of our full-time employees are in the United States (including 208 who are based out of our corporate headquarters in Menlo Park, California), six of our full-time employees are in Europe, and one of our full-time employees is in China.

311 of our full-time employees are located in the United States, six are located in Europe and eight are located in China.

As of December 31, 2021, more than 50% of our employees had completed a Ph.D.

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We consider our relations with our employees to be good.

The use of independent contractors is not a material part of our workforce strategy.

We believe we are in compliance with the regulations established by the state of California Division of Occupational Safety and Health Requirements and California Environmental Protection Agency applicable to our operations in Menlo Park, California.

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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 1. Business