What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2022-02-24 compared with 2021-02-25 · 185 added, 199 removed, 170 unchanged (69% of the section changed)

4 unchanged sentences

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.

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.

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.

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 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 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 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 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.

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.

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.

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 VA MVP, which has enabled us to innovate, scale our operational infrastructure, and achieve greater efficiencies in our lab.

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 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 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.

For example, the previous shelter-in-place order 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 return in similar or more stringent form, they may continue to cause such effects on our operations.

The COVID-19 pandemic has also disrupted, and may continue to 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 and vaccines.

We use such consumables in our operations, and we have faced, and may face in the future, 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 prior year 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.

While authorities in many areas have lifted or relaxed pandemic-related restrictions, in some cases they have subsequently re-imposed various restrictions after observing an increased rate of COVID-19 cases as the global COVID-19 pandemic continues to rapidly evolve and to present serious health risks.

There is no guarantee when or if all such restrictions and recommendations 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.

The full extent of the impact of the COVID-19 pandemic on our business, operations and plans remains uncertain and will depend on future developments that cannot be predicted at this time.

Such developments include the continued spread of the Omicron variant in the U.S.

and other countries and the potential emergence of other SARS-CoV-2 variants that may prove especially contagious or virulent, the ultimate duration of the pandemic and the resulting impact on our business and other third parties with whom we do business, and the effectiveness of actions taken globally to contain and treat the disease.

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

5 unchanged sentences

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.

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

We believe that our ability to convert initial pilots into larger orders from existing customers has the potential to drive substantial long-term revenue.

1 unchanged sentence

Adoption of our products and solutions by new customers.

While new customers initially may not account for significant revenues, we believe that they have the potential to grow substantially over the long term as they gain confidence in our service.

While new customers initially may not account for significant revenue, we believe that they have the potential to grow substantially over the long term as they gain confidence in our service.

Our ability to engage new customers is critical to our long-term success.

1 unchanged sentence

Accessing these new customers through scientific engagement and marketing to gain initial buy-in is critical to our success and gives us the opportunity to demonstrate the utility of our platform.

Our revenues and costs are affected by the volume of samples we receive from customers from period to period.

Our revenue and cost are affected by the volume of samples we receive from customers from period to period.

The timing and size of sample shipments received after orders have been placed is variable.

Since sample shipments can be large, and are often received from a third party, the timing of arrival can be difficult to predict over the short term.

Although our long-term performance is not affected, we do see quarter-to-quarter volatility due to these factors.

Although our long-term performance is not affected, we see quarter-to-quarter volatility due to these factors.

Samples arriving later than expected may not be processed in the quarter proposed and result in revenue the following quarter.

Since many of our customers request defined turnaround times, we employ project managers to coordinate and manage the complex process from sample receipt to sequencing and delivery of results.

Investment in product innovation to support commercial growth.

Investment in product innovation to support growth.

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

We have invested significantly in our NeXT Platform, introducing 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 have invested significantly in our NeXT Platform, introducing new products and additional capabilities in the past two years, including 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), and NeXT Personal (liquid biopsy offering for personalized tumor tracking for patients).

We are currently investing in the development of future new product offerings, including NeXT CDx (diagnostic test) and NeXT Database (comprehensive tumor immune-genomics database).

We are also collaborating with key opinion leaders from cancer centers, such as Mayo Clinic and UC San Diego Moores Cancer Center, 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.

2 unchanged sentences

With our current operating model and infrastructure, we can increase our production and commercialize new generations of our platform, but as our volumes continue to increase we will ultimately need to invest in additional production capabilities.

We expect to grow our revenues and spread our costs over a larger volume of services.

We expect to grow our revenue and spread our costs over a larger volume of services.

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

Components of Operating Results

We derive our revenues primarily from sequencing and data analysis services to support the development of next-generation cancer therapies and to support large-scale genetic research programs.

We derive our revenue primarily from sequencing and data analysis services to support the development of next-generation cancer therapies and to support large-scale genetic research programs.

We support our customers by providing high-accuracy, validated genomic sequencing and advanced analytics.

Many of these analytics are related to state-of-the-art biomarkers, including those relevant to immuno-oncology therapeutics such as checkpoint inhibitors.

Our revenues are primarily generated through contracts with companies in the pharmaceutical industry, healthcare organizations, and government entities.

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

Our revenue is primarily generated through contracts with companies in the pharmaceutical industry, healthcare organizations, and government entities.

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

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.

Since 2018, we derived a substantial portion of our revenue from sales of our DNA sequencing and data analysis services to the VA MVP.

However, we do not anticipate deriving such substantial portions of our revenue from the VA MVP in future periods.

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

1 unchanged sentence

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

Substantially all of our revenues to date have been derived from sales in the United States.

Substantially all of our revenue to date has been derived from sales in the United States.

Costs and Expenses

Costs of revenues

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.

Cost of Revenue

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

We expect cost of revenue to increase as our revenue grows, and in the short term cost of revenue may outpace revenue growth as we invest in expanding our laboratory capacity, including additional costs associated with our future laboratory in Fremont, California.

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 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.

These expenses consist primarily of personnel costs (salaries, bonuses, stock-based compensation, payroll taxes, and benefits), laboratory supplies and consumables, costs of processing 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.

We expense our research and development expenses in the period in which they are incurred.

We expect to increase our research and development expenses as we continue to develop new products.

We expense our research and development costs in the period in which they are incurred.

We expect to increase our research and development expenses as we continue to develop new products and incur additional costs associated with our future headquarters in Fremont, California.

Selling, General and Administrative Expenses

2 unchanged sentences

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 expense all selling, general and administrative costs 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 to increase as we scale our operations.

Interest Income

We expect general and administrative expenses to increase as we scale our operations and incur additional costs associated with ramping up our new headquarters facility in Fremont, California.

Interest Income and Interest Expense

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

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.

Since the first quarter of 2020, our interest income has been adversely impacted by declines in yields on debt securities.

Interest expense in 2021 is the recognition of imputed interest on noninterest bearing loans.

Interest expense in 2019 and prior years consisted of cash and non-cash interest costs related to previously outstanding loans.

Loss on Debt Extinguishment

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

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

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

1 unchanged sentence

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.

Other income (expense), net consists primarily of foreign currency exchange gains and losses, and realized gains or losses associated with sales of marketable securities.

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

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

6 unchanged sentences

Costs and expenses

Costs of revenues

Cost of revenue

Research and development

5 unchanged sentences

Loss on debt extinguishment

Other (expense) income, net

Other income (expense), net

Loss before income taxes

11 unchanged sentences

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.

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

Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 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, 2020.

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

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

Years Ended December 31,

All other customers

Total revenues

The following table shows concentration of revenues by customer:

Total revenue

The following table shows concentration of revenue by customer:

Year Ended December 31,

Merck & Co., Inc.

* Less than 10% of revenues

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.

* Less than 10% of revenue

The decrease of $10.5 million in revenue from the VA MVP in 2021 was primarily due to a decrease in the volume of samples we tested in the period.

As of December 31, 2021, we had a remaining backlog of $7.6 million under our current contract with the VA MVP, including the task order received in September 2021.

We expect to convert such amount into revenue during the first three quarters of 2022.

The recognition of significant revenue from the VA MVP in future periods after the completion of our current backlog is contingent on receipt of a new contract.

The VA MVP may not award us a new contract.

Further, the value of any such potential new contract may be lower than our current contract and historical contracted orders from the VA MVP, and/or the scope or nature of the services required under any such new contract may change such that we are unable to serve the VA MVP in the future.

The task order received in September 2021 had a value of up to approximately $9.7 million, which represents a substantial decline compared to historical contracted orders.

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 not be an 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 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 will decline significantly in 2022 and future periods.

All other 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.

The increase of $17.3 million in revenue from all other customers in 2021 was driven primarily by strong demand from large pharmaceutical customers for our NeXT Platform products, which resulted in an increase in the volume of samples we tested during 2021.

Revenue from Natera contributed $8.6 million of the increase due to increased sample receipts under our agreement to provide advanced tumor analysis for use in Natera’s MRD testing offerings.

Revenue derived from our NeXT Platform products, which includes revenue from Natera, was $27.9 million in 2021, compared to $8.2 million in 2020, an increase of $19.7 million.

Based on the relatively large dollar value of orders received from all other customers throughout fiscal 2021, we anticipate that revenue from all other customers will make up the majority of our total revenue in fiscal year 2022.

Costs and Expenses

1 unchanged sentence

(in thousands)

Costs of revenues

Cost of revenue

Research and development

1 unchanged sentence

Total costs and expenses

Costs of revenues

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.

Cost of revenue

The decrease in cost of revenue in 2021, despite a revenue increase in the same period, was primarily due to favorable customer mix and efficiencies within our laboratory operations.

Raw materials costs were lower, relative to revenue, for non-VA MVP customer orders, resulting in favorable customer mix in 2021.

We also observed more efficient sample processing overall in 2021, including less labor and overhead required per sample processed, which was favorable for both VA MVP and non-VA MVP orders.

The cost components related to the $4.7 million decrease in cost of revenue in 2021 were a $3.2 million decrease in raw materials costs due to favorable customer mix, a $3.1 million decrease in indirect costs due to a higher utilization of our laboratory for research and development activities, and a $0.3 million decrease in the cost of laboratory supplies and consumables, partially offset by a $1.1 million increase in labor costs as a result of increased headcount, and a $0.8 million increase in depreciation and maintenance on lab equipment.

Research and development

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.

The $20.7 million increase in research and development in 2021 was primarily due to development of new products and lab automation efforts and consisted of a $12.1 million increase in personnel-related costs primarily related to increased headcount, a $5.1 million increase in sample processing costs incurred in our laboratory for new product development, a $2.0 million increase in IT and fixed facilities costs, a $1.0 million increase in depreciation and maintenance on research and development equipment, and a $0.5 million increase in consulting fees.

Selling, general and administrative

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

The $14.0 million increase in selling, general and administrative in 2021 was primarily due to a $8.6 million increase in personnel-related costs related to increased headcount, a $2.6 million increase in professional services (including corporate insurance, audit fees, and legal expenses), a $1.6 million increase in rent expense primarily related to our new Fremont facility, and a $1.2 million charge in connection with the modification of stock options held by two non-employee board members.

Interest Income, Interest Expense and Other Expense, Net

Year Ended December 31,

3 unchanged sentences

Loss on debt extinguishment

Other income (expense), net

Interest income

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

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.

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.

Other expense, net

Interest income and interest expense

The decrease in interest income in 2021 was driven by declines in yields on debt securities, partially offset by higher average cash and investment balances subsequent to our follow-on equity offerings in August 2020 and January 2021.

Interest expense in 2021 is the recognition of imputed interest on noninterest bearing loans.

Other expense, net

Other expense, net in 2021 and 2020 consisted of foreign currency transaction gains and losses and remeasurements.

Liquidity and Capital Resources

5 unchanged sentences

Year Ended December 31,

Net cash (used in) provided by operating activities

Net cash used in 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.

Net cash provided by financing activities

From our inception through December 31, 2021, we have funded our operations primarily from $279.0 million in net proceeds from our follow-on equity offerings in August 2020 and January 2021, $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, 2021, we had cash and cash equivalents in the amount of $105.6 million and short-term investments in the amount of $181.5 million.

3 unchanged sentences

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.

We filed a prospectus supplement in January 2022 pursuant to which we could offer and sell additional shares of our common stock up to an aggregate amount of $100.0 million through an at-the-market offering program.

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.

3 unchanged sentences

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.

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.

As of December 31, 2021, cash and cash equivalents held by foreign subsidiaries was $2.1 million.

Our intent is to indefinitely reinvest funds held outside the United States and our current plans do not demonstrate a need to repatriate them to fund our domestic operations.

However, if in the future, we encounter a significant need for liquidity domestically or at a particular location that we cannot fulfill through borrowings, equity offerings, or other internal or external sources, or the cost to bring back the money is not significant from a tax perspective, we may determine that cash repatriations are necessary or desirable.

Repatriation could result in additional material taxes.

These factors may cause us to have an overall tax rate higher than other companies or higher than our tax rates have been in the past.

During 2021, cash used in operating activities of $70.8 million was a result of $65.2 million of net loss and a net negative change in operating assets and liabilities of $31.1 million (of which $17.1 million was related to reductions in outstanding customer prepayments as we fulfilled the related revenue contracts and $12.1 million due to an increase in accounts receivable), partially offset by non-cash adjustments to net income of $25.5 million (the most significant non-cash expenses were $14.4 million of stock-based compensation and $6.0 million of depreciation and amortization).

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

During 2021, cash used in investing activities was $60.1 million due to net purchases of short-term investments of $49.0 million and $11.1 million in payments for property and equipment.

Cash provided by financing activities of $169.7 million during the same period consisted of $162.3 million net proceeds from our January 2021 follow-on offering, $5.2 million proceeds from loans, and $4.4 million proceeds from stock option exercises and purchases under our Employee Stock Purchase Plan (“ESPP”), partially offset by $1.9 million repayments of loans and $0.3 million of offering costs.

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 in payments for property and equipment.

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, $4.2 million proceeds from stock option exercises and purchases under our ESPP, partially offset by $0.4 million of offering costs.

Material Cash Requirements

Our material cash requirements in the short- and long-term consist primarily of capital expenditures, variable costs of revenue, operating expenditures, property leases, and other.

We plan to fund our material cash requirements with our existing cash and cash equivalents and short-term investments, which amounted to $287.1 million as of December 31, 2021, as well as anticipated cash receipts from customers.

Capital expenditures.

We expect to increase capital expenditures in future periods to support our global growth initiatives.

Such expenditures are expected to consist primarily of facility renovations and improvements, laboratory equipment, and computer equipment.

We currently expect capital expenditures to be between $55 and $65 million in 2022 and between $10 and $15 million in each of the next two fiscal years.

In connection with our new headquarters and laboratory facility in Fremont, California, we expect to

spend between $ 45 and $ 50 million (net of expected landlord reimbursements) in combined leasehold improvements, renovations, administrative, and other costs through the end of 2022.

This is the reason for greater expected capital expenditures in 2022 as compared to the following two years.

Variable costs of revenue.

From time to time in the ordinary course of business, we enter into agreements with vendors for the purchase of raw materials, laboratory supplies and consumables to be used in the sequencing of customer samples.

However, we generally do not have binding and enforceable purchase orders beyond the short term, and the timing and magnitude of purchase orders beyond such period is difficult to accurately project.

Another primary use of cash within variable costs of revenue relates to paying our workforce.

We currently expect spend to decrease in 2022 but increase in years thereafter to support revenue growth.

Operating expenditures.

Our primary use of cash relates to paying employees, spend on professional services, spend related to research and development projects, and other costs related to our research and development, selling, general and administrative functions.

We currently expect to increase our spend in these areas to support our business growth in 2022.

On a long-term basis, we manage future cash requirements relative to our long-term business plans.

Property leases.

Our noncancelable operating lease payments were $84.6 million as of December 31, 2021.

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.

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.”

During the second quarter of 2021, we entered into two noninterest bearing loans to finance the purchase of $5.6 million of computer hardware, internal use software licenses, and related ongoing support.

We made payments of $1.86 million in 2021.

We are required to make payments of $1.86 million in each of 2022 and 2023.

Further discussion of this transaction can be found in Part II, Item 1 of this Form 10-K in the Notes to Consolidated Financial Statements in Note 6, “Loans.”

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.

2 unchanged sentences

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.

When a customer that has prepaid us for future services cancels its contract with us, reduces the level of services that it expects to receive, or we determine that a prepayment is no longer necessary, we will repay that customer’s deposit.

We do not expect such repayments to require material amounts of cash.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with U.S.

The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and related disclosures.

The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures.

Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.

1 unchanged sentence

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably possible could materially impact the financial statements.

We believe that the assumptions and estimates associated with the accounting policies discussed below have the greatest potential impact on our consolidated financial statements.

We believe that the assumptions and estimates associated with revenue recognition, stock-based compensation, and leases have the greatest potential impact on our consolidated financial statements.

Therefore, we consider these to be our critical accounting policies and estimates.

Revenue Recognition

We generate our revenues from selling sequencing and data analysis services.

We generate our revenue from selling sequencing and data analysis services.

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

8 unchanged sentences

We have analyzed such discounts if they represent a material right provided to a customer.

We have concluded that such discounts do not represent a material right provided to a customer since they are not deemed to be incremental to the pricing offered to the customer or are not enforceable options to acquire additional goods.

As a result, these discounts do not constitute a material right and do not meet the definition of a separate performance obligation.

We do not offer retrospective discounts or rebates.

We have concluded that such discounts generally do not represent a material right provided to a customer since they are not deemed to be incremental to the pricing offered to the customer or are not enforceable options to acquire additional goods.

As a result, these discounts do not constitute a material right and do not meet the definition of a separate performance obligation, except in limited instances.

We do not offer retrospective discounts

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

4 unchanged sentences

We recognize revenue when control of the promised services is transferred to our customers.

Management applies judgment in evaluating when a customer obtains control of the promised service, which is when the sequencing and data analysis service results are delivered to customers, at an amount that reflects the consideration to which we expect to be entitled to in exchange for those services.

Management has determined that customers obtain control when the sequencing and data analysis service results are delivered to customers.

Revenue is recorded net of sales or other transaction taxes collected from clients and remitted to taxing authorities.

1 unchanged sentence

We record a customer contract liability for performance obligations outstanding related to payments received in advance for customer deposits.

We expect to satisfy these remaining performance obligations and recognize the related revenues upon providing sequencing and data analysis services.

All of our revenues and trade receivables are generated from contracts with customers and substantially all of our revenues are derived from U.S.

We expect to satisfy these remaining performance obligations and recognize the related revenue upon providing sequencing and data analysis services.

All of our revenue and trade receivables are generated from contracts with customers and substantially all of our revenue is derived from U.S.

domestic operations.

The following section describes the accounting policies that we believe have significant judgment, or changes in judgment, as a result of adopting ASC Topic 606.

Payment Terms

4 unchanged sentences

Stock-Based Compensation

We account for stock-based compensation arrangements with employees, using a fair value-based method, for costs related to all stock-based payments including stock options and stock awards.

Our determination of the fair value of stock options on the date of grant utilizes the Black-Scholes option-pricing model.

The fair value of the option granted is recognized over the period during which an optionee is required to provide services in exchange for the option award, known as the requisite service period which usually is the vesting period, on a straight-line basis.

For options granted to employees, non-employees, and directors, stock-based compensation is measured at grant date based on the fair value of the award.

We determine the grant-date fair value of options using the Black-Scholes option-pricing model, except for certain performance-based awards for which an alternative valuation method may be used.

We determine the fair value of restricted stock unit awards using the closing market price of the Company’s common stock on the date of grant.

The grant-date fair value of awards is amortized over the employees’ requisite service period on a straight-line basis, or the non-employees’ vesting period as the goods are received or services rendered.

Forfeitures are accounted for as they occur.

Additionally, our ESPP is deemed to be a compensatory plan and therefore is included in stock-based compensation expense.

Estimating the fair value of equity-settled awards as of the grant date using valuation models, such as the Black-Scholes option-pricing model, is affected by assumptions regarding a number of complex variables.

3 unchanged sentences

We have elected to use the “simplified method” for estimating the expected term of the options, whereby the expected term equals the arithmetic average of the vesting term and the original contractual term of the option.

Expected Volatility —For all stock options granted to date, the volatility data was estimated based on a study of publicly traded industry peer companies.

Expected Volatility —For all stock options granted to date, expected volatility was estimated based on an average historical stock price volatility of a peer group of publicly traded companies as we did not have sufficient trading history for our own common stock.

For purposes of identifying these peer companies, we considered the industry, stage of development, size, and financial leverage of potential comparable companies.

2 unchanged sentences

Risk-Free Interest Rate —The risk-free interest rate is based on the yield available on U.S.

Treasury zero-coupon issues similar in duration to the expected term of the equity-settled award.

We estimated the fair value of the time-based employee stock options using the Black-Scholes option-pricing model based on the date of grant with the following assumptions:

Common Stock Valuations

The estimated fair value of the common stock underlying our stock options was determined at each grant date by our board of directors, with input from management.

All options to purchase shares of our common stock are intended to be exercisable at a price per share not less than the per-share fair value of our common stock underlying those options on the date of grant.

In the absence of a public trading market for our common stock prior to our IPO, on each grant date, we developed an estimate of the fair value of our common stock based on the information known to us on the date of grant, upon a review of any recent events and their potential impact on the estimated fair value per share of the common stock, and in part on input from an independent third-party valuation firm.

As provided in Section 409A of the U.S.

Internal Revenue Code of 1986, as amended (the “Code”), we generally relied on our valuations for up to 12 months unless we experienced a material event that would have affected the estimated fair value per common share.

Our valuations of our common stock were determined in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation (the “Practice Aid”).

The methodology to determine the fair value of our common stock included estimating the fair value of the enterprise using the “backsolve” method, which estimates the fair value of our company by reference to the value and preferences of our last round of financing, as well as our capitalization.

The assumptions used to determine the estimated fair value of our common stock were based on numerous objective and subjective factors, combined with management’s judgment, including external market conditions affecting the pharmaceutical and biotechnology industry and trends within the industry:

our stage of development;

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

the prices at which we sold shares of our redeemable convertible preferred stock;

our financial condition and operating results, including our levels of available capital resources;

the progress of our research and development efforts, our stage of development, and business strategy;

equity market conditions affecting comparable public companies;

market conditions and the lack of marketability of our common stock.

The Practice Aid identifies various available methods for allocating enterprise value across classes and series of capital stock to determine the estimated fair value of common stock at each valuation date.

In accordance with the Practice Aid, we considered the following methods:

Income approach .

The income approach attempts to value an asset or security by estimating the present value of the future economic benefits it is expected to produce.

These benefits can include earnings, cost savings, tax deductions, and disposition proceeds from the asset.

An indication of value may be developed in this approach by discounting expected cash flows to their present value at a rate of return that incorporates the risk-free rate for the use of funds, the expected rate of inflation over the asset’s holding period, and the risks associated with realizing the cash flows in the amounts and at the times projected.

The discount rate selected is typically based on rates of return available from alternative investments of similar type and quality as of the valuation date.

The most commonly employed income approach to valuation is the discounted cash flow analysis.

Market Approach .

The market approach attempts to value an asset or security by examining observable market values for similar assets or securities.

Sales and offering prices for comparable assets are adjusted to reflect differences between the asset being valued and the comparable assets, such as, location, time and terms of sale, utility, and physical characteristics.

When applied to the valuation of equity, the analysis may include consideration of the financial condition and operating performance of the company being valued relative to those of publicly traded companies or to those of companies acquired in a single transaction, which operate in the same or similar lines of business.

Cost Approach .

The cost approach to valuation is based upon the concept of replacement cost as an indicator of value and the notion that an investor would pay no more for an asset than what it would cost to replace the asset with one of equal utility.

The cost approach estimates value based upon the estimated cost of replacing or reproducing the asset, less adjustments for physical deterioration and functional obsolescence, if relevant.

When applied to an enterprise, a type of cost approach referred to as the Net Asset Method is sometimes employed.

This method measures the value of equity as the sum of the values of its assets reduced by the sum of the values of its liabilities.

The resulting equity is reflective of a 100% ownership interest in the business.

This approach is frequently used in valuing holding companies.

Based on our early stage of development and other relevant factors, we considered all three approaches and chose to apply both income and market approaches in our analyses.

We determined these approaches were the most appropriate methods for allocating our enterprise value to determine the estimated fair value of our common stock for valuations performed for periods up to our IPO.

In determining the estimated fair value of our common stock, our board of directors also considered the fact that our stockholders could not freely trade our common stock in the public markets.

Accordingly, we applied discounts to reflect the lack of marketability of our common stock based on the weighted-average expected time to liquidity.

The estimated fair value of our common stock at each grant date reflected a non-marketability discount partially based on the anticipated likelihood and timing of a future liquidity event.

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.

Treasury zero-coupon issues similar in duration to the expected term of the award.

Incremental Borrowing Rate

Lease liabilities are recognized at the present value of the fixed lease payments, reduced by landlord incentives, using a discount rate based on the Company’s current borrowing rate at the lease commencement date (the incremental borrowing rate), unless the rate implicit in the lease is readily determinable.

In August 2021, we entered into a 13.5-year lease for our new corporate headquarters.

We estimated our incremental borrowing rate as the rate implicit in the lease was not readily determinable.

To determine the incremental borrowing rate, we estimated our credit rating by comparing certain financial ratios and metrics of the Company to those of other issuers with publicly available credit ratings from Standard & Poor’s (S&P).

We then adjusted yields from publicly traded corporate bonds of companies of similar size and credit rating over a term approximating the term of our lease for the nature of the collateral.

Our concluded incremental borrowing rate for this lease was 5.8%, which resulted in a lease liability and right-of-use asset of $44.7 million .

JOBS Act Accounting Election

We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”).

Prior to December 31, 2021, we were a smaller reporting company and eligible to take advantage of the same reduced disclosures that an emerging growth company, as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”), could avail itself to.

Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies.

We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards, and therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

We had irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards, and therefore, are subject to the same new or revised accounting standards as other public companies that are not smaller reporting companies or emerging growth companies.

Recent Accounting Pronouncements

See the sections titled “Summary of Significant Accounting Policies—Recent Accounting Pronouncements” and “—Recent Accounting Pronouncements Not Yet Adopted” in Note 2 to our consolidated financial statements for additional information.

Quantitative and Qualitative Disclosures About Market Risk.

As a “smaller reporting company”, we are not required to provide the information under this item.

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