425

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 8-K

Current Report

Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): March 12, 2021

Illumina, Inc.

(Exact name of registrant as specified in its charter)

001-35406

(Commission File Number)

Delaware	33-0804655
(State or other jurisdiction of incorporation)	(I.R.S. Employer Identification No.)

5200 Illumina Way, San Diego, CA 92122

(Address of principal executive offices) (Zip code)

(858) 202-4500

(Registrant’s telephone number, including area code)

N/A

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

☒ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

☐ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

☐ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

☐ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value	ILMN	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

Emerging growth company  ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13a of the Exchange Act.  ☐

Item 8.01. Other Events.

Illumina, Inc. (“Illumina”) is filing this Current Report on Form 8-K to provide certain financial information with respect to GRAIL, Inc., a Delaware corporation (“GRAIL”) and Illumina’s proposed acquisition of GRAIL. As previously disclosed, on September 20, 2020, Illumina entered into an Agreement and Plan of Merger (as amended on February 4, 2021 by the Amendment to the Agreement and Plan of Merger, the “Merger Agreement”) with SDG Ops, Inc., a Delaware corporation and direct, wholly owned subsidiary of Illumina, SDG Ops, LLC, a Delaware limited liability company and direct, wholly owned subsidiary of Illumina, and GRAIL, pursuant to which, through two successive mergers, GRAIL will be acquired by Illumina (the “Transaction”).

As previously disclosed, as a result of the Transaction, each share of Class A Common Stock, par value $0.001 per share, Class B Common Stock, par value $0.001 per share, Series A Preferred Stock, par value $0.001 per share, Series B Preferred Stock, par value $0.001 per share, Series C Preferred Stock, par value $0.001 per share, and Series D Preferred Stock, par value $0.001 per share, of GRAIL (collectively, “GRAIL Stock”) issued and outstanding immediately prior to the effective time of the first merger (the “Effective Time”) (other than cancelled shares or dissenting shares) will be automatically converted into, at the holder’s election, either:

• The right to receive (i) an amount in cash, without interest, equal to the amount obtained by dividing $3,500,000,000 plus the Aggregate Option Exercise Price (as defined below) by the GRAIL Fully Diluted Share Count (as defined in the Merger Agreement) (the “Cash Consideration”), plus (ii) a number of shares of common stock, par value $0.01 per share, of Illumina (the “Illumina Common Stock”) obtained by dividing the Aggregate Stock Consideration (as defined in the Merger Agreement) by the GRAIL Fully Diluted Share Count (the “Stock Consideration”), plus (iii) one contingent value right (a “CVR”) issued by Illumina, subject to and in accordance with the CVR Agreement (as defined in the Merger Agreement) (the “CVR Consideration”); or

• The right to receive (i) the Cash Consideration, plus (ii) the Stock Consideration, plus (iii) a number of shares of Illumina Common Stock and/or an amount in cash, such number and/or amount to be determined by Illumina in its sole discretion (the “Alternative Consideration”).

In accordance with the terms of the Merger Agreement, Illumina has set the Alternative Consideration at a number of shares of Illumina Common Stock obtained by dividing the Aggregate Alternative Consideration (as defined below) by the GRAIL Fully Diluted Share Count.

“Aggregate Option Exercise Price” means: the aggregate exercise price of all Company Stock Options (as defined in the Merger Agreement) that are outstanding as of immediately prior to the Effective Time.

“Aggregate Alternative Consideration” means: (i) if the Average Illumina Stock Price (as defined below) is an amount greater than or equal to $280, then the Aggregate Alternative Consideration will be a number of shares of Illumina Common Stock equal to the quotient obtained by dividing (x) $850,000,000 by (y) the Average Illumina Stock Price or (ii) if the Average Illumina Stock Price is an amount less than $280, then the Aggregate Alternative Consideration shall be 3,035,714 shares of Illumina Common Stock.

“Average Illumina Stock Price” means: the volume-weighted average trading price of a share of Illumina Common Stock on The NASDAQ Global Select Market over the 20 consecutive trading day period ending on (and including) the trading day that is 10 trading days prior to the date of the Effective Time, rounded to four decimal places.

No fractional shares of Illumina Common Stock will be issued in the Transaction, and GRAIL stockholders will receive cash in lieu of any fractional shares of Illumina Common Stock they otherwise would have been entitled to receive.

The foregoing description of the Merger Agreement does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the Merger Agreement filed as Exhibit 2.1 to Illumina’s Current Report on Form 8-K filed on September 21, 2020 and the Amendment to the Merger Agreement filed as Exhibit 2.1 to Illumina’s Current Report on Form 8-K filed on February 5, 2021, each of which is incorporated herein by reference.

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Included as exhibits to this Current Report on Form 8-K are:

(a) the audited consolidated financial statements of GRAIL and the related notes thereto as of and for the years ended December 31, 2019 and 2018 and the related report of PricewaterhouseCoopers LLP, GRAIL’s independent registered public accounting firm, which are included as Exhibit 99.1;

(b) the unaudited condensed consolidated financial statements of GRAIL as of September 30, 2020 and for the three and nine months ended September 30, 2020 and 2019, which are included as Exhibit 99.2; and

(c) the unaudited pro forma condensed combined financial information of Illumina giving effect to the Transaction (the “Pro Forma Financial Information”), which combines the historical financial statements of Illumina and GRAIL, after giving effect to the Transaction and related financing, and is included as Exhibit 99.3. The unaudited pro forma condensed combined balance sheet is presented as if the Transaction and related financing occurred as of January 3, 2021. The unaudited pro forma condensed combined statement of operations for the twelve months ended January 3, 2021 gives effect to the acquisition as if the Transaction and related financing had occurred on December 30, 2019, the beginning of such period.

Also included in this Current Report on Form 8-K is the consent of PricewaterhouseCoopers LLP consenting to the inclusion of its report dated April 21, 2020 relating to the financial statements of GRAIL included as Exhibit 99.1, which is included as Exhibit 23.1.

The pro forma financial information included in this Current Report on Form 8-K has been presented for informational purposes only. It does not purport to represent the actual results of operations that Illumina and GRAIL would have achieved had the companies been combined during the periods presented in the Pro Forma Financial Information and is not intended to project the future results of operations that the combined company may achieve after the Transaction is consummated.

Additional Information and Where to Find It

Investors and security holders may obtain free copies of documents filed with the Securities and Exchange Commission (“SEC”) by Illumina through the website maintained by the SEC at www.sec.gov, through Illumina’s Investor Relations page (investor.illumina.com) or by writing to Illumina Investor Relations, 5200 Illumina Way, San Diego, CA 92122.

No Offer or Solicitation

This communication is for informational purposes only and is not intended to and does not constitute an offer to subscribe for, buy or sell, or the solicitation of an offer to subscribe for, buy or sell, or an invitation to subscribe for, buy or sell any securities or a solicitation of any vote or approval in any jurisdiction, nor shall there be any sale, issuance or transfer of securities in any jurisdiction in which such offer, invitation, sale or solicitation would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. No offer of securities shall be made except by means of a prospectus meeting the requirements of Section 10 of the Securities Act of 1933, as amended, and otherwise in accordance with applicable law.

Cautionary Notes on Forward-Looking Statements

This communication contains “forward-looking statements” within the meaning of the federal securities laws, including Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. In this context, forward-looking statements often address expected future business and financial performance and financial condition, and often contain words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “see,” “will,” “would,” “may,” “target,” similar expressions and variations or negatives of these words. Forward-looking statements by their nature address matters that are, to different degrees, uncertain, such as statements about the consummation of the proposed Transaction and the anticipated benefits thereof. These and other forward-looking statements are not guarantees of future results and are subject to risks, uncertainties and assumptions that could cause actual results to differ materially from those expressed in any forward-looking statements, including the failure to consummate the proposed Transaction or to make any filing or take other action required to consummate such Transaction in a timely matter or at all. Important risk factors that may cause such a difference include, but are not limited to: (i) the proposed Transaction may not be completed on anticipated terms and timing, (ii) a condition to closing of the Transaction may not be satisfied, including obtaining regulatory approvals, (iii) the potential impact of unforeseen liabilities, future capital expenditures, revenues, costs, expenses, earnings, synergies, economic performance, indebtedness, financial condition and losses on the future prospects, business and management strategies for the management, expansion and growth of Illumina’s business after the consummation of the Transaction, (iv) potential adverse reactions or changes to business relationships resulting from the announcement or completion of the Transaction, (v) any negative effects of the announcement, pendency or consummation of the Transaction on the market price of Illumina’s common stock and on Illumina’s operating results, (vi) risks associated with third-party contracts containing consent and/or

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other provisions that may be triggered by the proposed Transaction, (vii) the risks and costs associated with the integration of, and the ability of Illumina to integrate, GRAIL’s business successfully and to achieve anticipated synergies, (viii) the risks and costs associated with the development and commercialization of, and Illumina’s ability to develop and commercialize, GRAIL’s products, (ix) the risk that disruptions from the proposed Transaction will harm Illumina’s business, including current plans and operations, (x) legislative, regulatory and economic developments, (xi) the other risks described in Illumina’s most recent annual reports on Form 10-K and quarterly reports on Form 10-Q and in Illumina’s registration statement on Form S-4 filed with the SEC on November 25, 2020, as amended on February 5, 2021, and (xii) management’s response to any of the aforementioned factors.

While the list of factors presented here is considered representative, no such list should be considered to be a complete statement of all potential risks and uncertainties. Unlisted factors may present significant additional obstacles to the realization of forward-looking statements. Consequences of material differences in results as compared with those anticipated in the forward-looking statements could include, among other things, business disruption, operational problems, financial loss, legal liability to third parties and similar risks, any of which could have a material adverse effect on Illumina’s financial condition, results of operations, credit rating or liquidity. Illumina does not assume any obligation to publicly provide revisions or updates to any forward-looking statements, whether as a result of new information, future developments or otherwise, should circumstances change, except as otherwise required by securities and other applicable laws.

Item 9.01. Exhibits.

Exhibit Number	Description of Exhibit
23.1	Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm of GRAIL, Inc.
99.1	The audited consolidated financial statements of GRAIL, Inc. and the related notes thereto as of and for the years ended December 31, 2019 and 2018 and the related report of PricewaterhouseCoopers LLP, GRAIL, Inc.’s independent registered public accounting firm.
99.2	The unaudited condensed consolidated financial statements of GRAIL, Inc. as of September 30, 2020 and for the three and nine months ended September 30, 2020 and 2019.
99.3	The unaudited pro forma condensed combined financial information of Illumina, Inc., which combines the historical financial statements of Illumina, Inc. and GRAIL, Inc., after giving effect to the acquisition and related financing.
104	Cover Page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

Date: March 12, 2021

ILLUMINA, INC.
By:	/s/ Sam A. Samad
Name:	Sam A. Samad
Title:	Senior Vice President and Chief Financial Officer

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (Nos. 333-125100 and 333-254195) and Form S-8 (No. 333-206215) of Illumina, Inc. of our report dated April 21, 2020 relating to the financial statements of GRAIL, Inc., which appears in this Current Report on Form 8-K.

/s/ PricewaterhouseCoopers LLP

San Jose, California

March 12, 2021

EX-99.1

Exhibit 99.1

GRAIL AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018

GRAIL, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
AUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Registered Public Accounting Firm		2
Consolidated Balance Sheets		3
Consolidated Statements of Operations		4
Consolidated Statements of Comprehensive Loss		5
Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Deficit		6
Consolidated Statements of Cash Flows		7
Notes to Consolidated Financial Statements		8

1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of GRAIL, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of GRAIL, Inc. and its subsidiaries (the “Company”) as of December 31, 2019 and 2018, and the related consolidated statements of operations, of comprehensive loss, of redeemable convertible preferred stock and stockholders’ deficit and of cash flows for the years then ended, including the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

Change in Accounting Principle

As discussed in Note 2 to the financial statements, the Company changed the manner in which it accounts for leases in 2019.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

San Jose, California

April 21, 2020

We have served as the Company’s auditor since 2017.

2

GRAIL, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

	As of December 31,
	2018			2019
Assets
Current assets:
Cash and cash equivalents	$	95,094		$	143,189
Short-term marketable securities		546,256			401,155
Prepaid expenses and other current assets		6,539			12,585
Prepaid expenses and other current assets—related party		1,342			584
Total current assets		649,231			557,513
Property and equipment, net		29,604			23,078
Property and equipment, net—related parties		3,435			1,347
Operating lease right-of-use assets		—			35,036
Long-term marketable securities		—			13,933
Restricted cash		1,630			1,228
Other non-current assets		2,945			3,384
Total assets	$	686,845		$	635,519
Liabilities, redeemable convertible preferred stock, and stockholders’ deficit
Current liabilities:
Accounts payable	$	12,390		$	5,880
Accounts payable—related parties		361			207
Accrued liabilities		36,961			31,584
Accrued liabilities—related parties		21,209			—
Liability for early exercise of unvested stock options, current portion		1,451			1,855
Operating lease liabilities		—			4,604
Other current liabilities		1,785			800
Total current liabilities		74,157			44,930
Finance lease payable, net of current portion		800			—
Deferred rent, net of current portion		6,909			—
Operating lease liabilities, net of current portion		—			36,638
Liability for early exercise of unvested stock options, net of current portion		2,251			349
Other non-current liabilities		2,356			3,075
Total liabilities		86,473			84,992
Commitments and contingencies (Note 7)
Redeemable convertible preferred stock:
Series A redeemable convertible preferred stock, $0.001 par value, 85,000,000 shares authorized as of December 31, 2018 and 2019; 85,000,000 shares issued and outstanding as of December 31, 2018 and 2019; aggregate liquidation preference of $85,000 as of December 31, 2018 and 2019		68,263			68,263
Series B redeemable convertible preferred stock, $0.001 par value, 309,256,591 shares authorized as of December 31, 2018 and 2019; 309,256,591 shares issued and outstanding as of December 31, 2018 and 2019; aggregate liquidation preference of $1,239,655 as of December 31, 2018 and 2019		1,235,404			1,235,404
Series C redeemable convertible preferred stock, $0.001 par value, 63,144,601 shares and 63,144,600 shares authorized as of December 31, 2018 and 2019, respectively; 63,144,600 shares issued and outstanding as of December 31, 2018 and 2019; aggregate liquidation preference of $300,000 as of December 31, 2018 and 2019		299,557			299,557
Series D redeemable convertible preferred stock, $0.001 par value, no shares authorized as of December 31, 2018, 48,942,833 shares authorized as of December 31, 2019; no shares issued and outstanding as of December 31, 2018, 31,323,413 shares issued and outstanding as of December 31, 2019; aggregate liquidation preference of $0 as of December 31, 2018 and $160,000 as of December 31, 2019		—			159,836
Total redeemable convertible preferred stock		1,603,224			1,763,060
Stockholders’ deficit:
Common stock, $0.001 par value; 715,179,000 (Class A—685,179,000 and Class B—30,000,000) shares and 863,943,220 (Class A—833,943,220 and Class B—30,000,000) shares authorized as of December 31, 2018 and 2019, respectively; 130,361,960 (Class A—105,372,563 and Class B— 24,989,397) and 134,663,097 (Class A—109,673,700 and Class B— 24,989,397) shares issued and outstanding as of December 31, 2018 and 2019, respectively		129			138
Additional paid-in capital		57,667			90,495
Accumulated other comprehensive income		128			2,465
Accumulated deficit		(1,060,776	)		(1,305,631	)
Total stockholders’ deficit		(1,002,852	)		(1,212,533	)
Total liabilities, redeemable convertible preferred stock, and stockholders’ deficit	$	686,845		$	635,519

The accompanying notes are an integral part of these consolidated financial statements.

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GRAIL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

	Year Ended December 31,
	2018			2019
Operating expenses:
Research and development	$	190,205		$	158,886
Research and development—related parties		32,955			8,202
Marketing		6,107			7,679
General and administrative		58,229			80,896
Total operating expenses		287,496			255,663
Loss from operations		287,496			255,663
Interest income, net		(12,550	)		(12,430	)
Other expense, net		287			1,817
Loss before provision for (benefit from) income taxes		275,233			245,050
Provision for (Benefit from) income taxes		485			(195	)
Net loss	$	275,718		$	244,855
Net loss attributable to Class A and Class B common stockholders
Basic and diluted	$	275,718		$	244,855
Net loss per share attributable to Class A and Class B common stockholders
Basic and diluted	$	(2.42	)	$	(1.99	)
Weighted-average shares of Class A and Class B common stock used in computing net loss per share attributable to Class A and Class B common stockholders
Basic and diluted		114,138,912			123,188,351

The accompanying notes are an integral part of these consolidated financial statements.

4

GRAIL, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

	Year Ended December 31,
	2018			2019
Net loss	$	275,718		$	244,855
Other comprehensive income:
Net unrealized gain on marketable securities		(371	)		(589	)
Foreign currency translation adjustment		(483	)		(1,748	)
Comprehensive loss	$	274,864		$	242,518

The accompanying notes are an integral part of these consolidated financial statements.

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GRAIL, INC.

CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT

(in thousands, except share data)

	Redeemable Convertible Preferred Stock																Common Stock
	Preferred Series A				Preferred Series B				Preferred Series C				Preferred Series D				Class A					Class B				Additional Paid-In Capital		Accumulated Other Compre- hensive (Loss) Income			Accumulated Deficit			Total Stock- holders’ Deficit
	Shares		Amount		Shares		Amount		Shares		Amount		Shares		Amount		Shares			Amount		Shares		Amount
Balance at January 1, 2018		85,000,000	$	68,263		309,256,591	$	1,235,404		—	$	—		—	$	—		100,503,548		$	95		24,989,397	$	25	$	43,468	$	(726	)	$	(785,058	)	$	(742,196	)
Issuance of shares upon exercise of options		—		—		—		—		—		—		—		—		5,734,164			4		—		—		1,549		—			—			1,553
Repurchases of early exercised stock options		—		—		—		—		—		—		—		—		(865,149	)		—		—		—		—		—			—			—
Vesting of early exercised stock options		—		—		—		—		—		—		—		—		—			3		—		2		1,609		—			—			1,614
Issuance of Series C redeemable convertible preferred stock, net of issuance costs of $443		—		—		—		—		63,144,600		299,557		—		—		—			—		—		—		—		—			—			—
Stock-based compensation expense		—		—		—		—		—		—		—		—		—			—		—		—		11,041		—			—			11,041
Other comprehensive		—		—		—		—		—		—		—		—		—			—		—		—		—		854			—			854
Net loss		—		—		—		—		—		—		—		—		—			—		—		—		—		—			(275,718	)		(275,718	)
Balance at December 31, 2018		85,000,000	$	68,263		309,256,591	$	1,235,404		63,144,600	$	299,557		—	$	—		105,372,563		$	102		24,989,397	$	27	$	57,667	$	128		$	(1,060,776	)	$	(1,002,852	)
Issuance of shares upon exercise of options		—		—		—		—		—		—		—		—		5,158,613			5		—		—		3,042		—			—			3,047
Repurchases of early exercised stock options		—		—		—		—		—		—		—		—		(857,476	)		—		—		—		—		—			—			—
Vesting of early exercised stock options		—		—		—		—		—		—		—		—		—			3		—		1		1,395		—			—			1,399
Issuance of Series D redeemable convertible preferred stock, net of issuance costs of $164		—		—		—		—		—		—		31,323,413		159,836		—			—		—		—		—		—			—			—
Stock-based compensation expense		—		—		—		—		—		—		—		—		—			—		—		—		28,391		—			—			28,391
Other comprehensive income		—		—		—		—		—		—		—		—		—			—		—		—		—		2,337			—			2,337
Net loss		—		—		—		—		—		—		—		—		—			—		—		—		—		—			(244,855	)		(244,855	)
Balance at December 31, 2019		85,000,000	$	68,263		309,256,591	$	1,235,404		63,144,600	$	299,557		31,323,413	$	159,836		109,673,700		$	110		24,989,397	$	28	$	90,495	$	2,465		$	(1,305,631	)	$	(1,212,533	)

The accompanying notes are an integral part of these consolidated financial statements.

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GRAIL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Year Ended December 31,
	2018			2019
Cash flows from operating activities
Net loss	$	(275,718	)	$	(244,855	)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization		14,080			10,307
Stock-based compensation expense		11,041			28,391
Loss on disposal of property and equipment		214			334
Loss on foreign currency		—			1,624
Impairment of property and equipment and other long-term assets		5,657			2,219
Amortization of premium (discount) on marketable securities		(4,209	)		(4,530	)
Changes in operating assets and liabilities:
Prepaid expenses and other assets		1,478			(5,553	)
Prepaid expenses and other assets—related party		458			758
Accounts payable		3,276			(6,393	)
Accounts payable—related parties		(3,614	)		(154	)
Accrued and other liabilities		16,868			(4,507	)
Accrued and other liabilities—related parties		21,209			(21,209	)
Operating lease right-of-use assets		—			4,025
Operating lease liabilities		—			(6,251	)
Net cash used by operating activities		(209,260	)		(245,794	)
Cash flows from investing activities
Purchases of property and equipment		(15,812	)		(3,332	)
Purchases of property and equipment—related parties		(177	)		—
Proceeds from the sale of property and equipment		476			82
Purchases of marketable securities		(681,130	)		(551,519	)
Proceeds from maturities of marketable securities		603,253			687,806
Net cash provided by (used by) investing activities		(93,390	)		133,037
Cash flows from financing activities
Proceeds from exercise of stock options		1,553			3,047
Proceeds from early exercise of unvested stock options		1,300			195
Repurchases of early exercised stock options		(282	)		(261	)
Proceeds from issuance of Series C redeemable convertible preferred stock, net		299,557			—
Proceeds from issuance of Series D redeemable convertible preferred stock, net		—			159,836
Payment of deferred offering costs		—			(932	)
Repayments of borrowings from finance lease		(1,510	)		(1,559	)
Net cash provided by financing activities.		300,618			160,326
Effect of exchange rate changes on cash, cash equivalents, and restricted cash		483			124
Net increase (decrease) in cash, cash equivalents, and restricted cash		(1,549	)		47,693
Cash, cash equivalents and restricted cash—beginning of year		98,273			96,724
Cash, cash equivalents and restricted cash—end of year	$	96,724		$	144,417
Represented by:
Cash and cash equivalents	$	95,094		$	143,189
Restricted cash		1,630			1,228
Total	$	96,724		$	144,417
Supplemental cash flow information:
Cash paid for interest	$	164		$	85
Supplemental disclosure of non-cash investing and financing activities:
Vesting of early exercised stock options		1,614			1,399
Property and equipment included in accounts payable and accrued liabilities		3,914			138
Deferred offering costs included in accrued liabilities		—			994

The accompanying notes are an integral part of these consolidated financial statements.

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GRAIL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. ORGANIZATION AND DESCRIPTION OF BUSINESS

GRAIL, Inc. (“GRAIL” or the “Company”) was incorporated in the State of Delaware in September 2015 and began operations as a stand-alone entity in February 2016. GRAIL is a healthcare company focused on developing technologies for early cancer detection. The Company is headquartered in Menlo Park, California.

Since inception, the Company has incurred losses from operations. The Company incurred losses from operations of $287.5 million and $255.7 million during 2018 and 2019, respectively. The Company had an accumulated deficit of $1.3 billion as of December 31, 2019. The Company has not yet launched a commercial product and may never develop a product that will generate revenues, including in amounts that will be sufficient to fund operations. Accordingly, the Company has been dependent on its ability to raise capital through equity issuances.

The Company had $558.3 million of cash, cash equivalents, and marketable securities at December 31, 2019. Based on the Company’s business plans, management believes that this is sufficient to meet its obligations for at least 12 months from the issuance date of these consolidated financial statements.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation

The consolidated financial statements for 2018 and 2019 include the accounts of GRAIL, Inc. and its wholly- owned subsidiaries. The consolidated financial statements are prepared in accordance with United States Generally Accepted Accounting Principles (U.S. GAAP). All intercompany balances and transactions have been eliminated on consolidation.

Use of Estimates

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of expenses in the consolidated financial statements and accompanying notes. On an ongoing basis, management evaluates its estimates, including those related to accrued clinical studies and research and development expenses, stock-based compensation expense, useful lives of intangible assets and property and equipment, determination of incremental borrowing rate for operating leases, and the provision (benefit) for income taxes. Actual results could differ from these estimates, and such differences could be material to the consolidated financial statements.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash, cash equivalents, and marketable securities.

Substantially all the Company’s cash and cash equivalents are deposited in accounts with four accredited financial institutions that management believes are of high-credit quality. Such deposits have and will continue to exceed federally insured limits. The Company has not experienced any losses on its cash deposits.

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The Company’s investment policy limits investments to certain types of securities issued by the U.S. government and its agencies and institutions with investment-grade credit ratings and places restrictions on maturities and concentration by type and issuer. The Company is exposed to credit risk in the event of a default by the financial institutions holding its cash, cash equivalents, and marketable securities, and by issuers of marketable securities to the extent recorded on the consolidated balance sheets. As of December 31, 2019, the Company had no off-balance sheet concentrations of credit risk.

Risks and Uncertainties

The Company is in the research and discovery stage and may never develop a product that will generate revenues, including in amounts sufficient to fund operations. The market for which the Company is developing products is highly competitive and rapidly changing. Difficulties or delays in the Company’s clinical studies, delays in planned commercial launch of the Company’s products, potential complications with the Company’s sole suppliers, complex regulatory regimes, regulatory issues and other factors could negatively impact the Company’s operating results.

In December 2019, a novel strain of coronavirus (COVID-19) was first reported in Wuhan, China and has since become a global pandemic. The extent of the impact of the coronavirus outbreak on the Company’s business will depend on certain developments, including the duration and spread of the outbreak and the extent and severity of the impact on the Company’s research activities at its primary operations and the operations of its suppliers as well as any further delay on clinical trial activities, all of which are uncertain and cannot be predicted. As of the date of issuance of these consolidated financial statements, the extent to which the coronavirus outbreak may materially impact the Company’s financial condition, liquidity, or results of operations is uncertain.

The Company may need to raise additional equity or debt financing to fund future operations that may not be available at terms acceptable to the Company, if at all. If the Company does not successfully commercialize its products in development, it will be unable to generate revenue from product sales or achieve profitability.

Segments

The Company operates and manages its business as one reportable operating segment. The Company’s chief operating decision maker reviews financial information on an aggregate basis for the purposes of evaluating financial performance and allocating the Company’s resources. 95% and 100% of the Company’s long-lived assets were located in the United States as of December 31, 2018 and 2019, respectively.

Fair Value of Financial Instruments

The Company determines the fair value of financial assets and liabilities using the fair value hierarchy established in Accounting Standards Codification (ASC) Topic 820, Fair Value Measurement (ASC 820). ASC 820 identifies fair value as the exchange price, or exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The hierarchy describes three levels of inputs that may be used to measure fair value, as follows:

Level 1 —Observable inputs, such as quoted prices in active markets for identical assets and liabilities.

Level 2 —Observable inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

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Level 3 —Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

The Company has not elected the fair value option as prescribed by ASC Topic 825, Financial Instruments, for its financial assets and liabilities that are not otherwise required to be carried at fair value. Under ASC 820, material financial assets and liabilities not carried at fair value are reported at their carrying values.

The carrying amounts for financial instruments such as prepaid expenses and other current assets, prepaid expenses and other current assets—related party, accounts payable, accounts payable—related parties, accrued liabilities and accrued liabilities—related parties approximate fair value due to their short-term maturities.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. Cash and cash equivalents consist of cash on deposit with banks denominated in U.S. Dollars, Hong Kong Dollars and British Pounds and marketable securities, as described below.

Marketable Securities

The Company generally invests its excess cash in money market funds and investment-grade short- to intermediate-term fixed income securities. Such investments are included in cash and cash equivalents, short-term marketable securities, or long-term marketable securities on the consolidated balance sheets, are considered available-for-sale, and reported at fair value with unrealized gains and losses included as a component of other comprehensive loss (income). The amortized cost of debt securities is adjusted for the amortization of premiums and accretion of discounts to maturity, which is included in interest expense (income), net, respectively, on the consolidated statements of operations. Realized gains and losses and declines in value judged to be other-than- temporary, if any, on marketable securities are included in other expense (income), net. The cost of securities sold is determined using specific identification.

The Company periodically evaluates whether declines in fair values of its marketable securities below their book value are other-than-temporary. The Company considers factors such as the duration, the severity and the reason for the decline in value, the potential recovery period and the Company’s intent to sell. For debt securities, the Company also considers whether (i) it is more likely than not that the Company will be required to sell the debt securities before recovery of their amortized cost basis, and (ii) the amortized cost basis cannot be recovered as a result of credit losses.

Restricted Cash

Restricted cash is comprised of cash and cash equivalents that are restricted as to withdrawal or use under the terms of certain contractual agreements.

Property and Equipment, Net

Property and equipment, net is stated at cost less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method, and the cost is amortized over the estimated

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useful lives of the assets. The Company estimates the useful lives of property and equipment by asset classification as described in Note 3, Balance Sheet Components. Leasehold improvements are amortized using the straight-line method over the shorter of the term of the lease agreement or the useful life of the improvements. The Company expenses repairs and maintenance costs as incurred. When an item is sold or disposed of, the cost and related accumulated depreciation or amortization is eliminated and the resulting gain or loss, if any, is recorded in the consolidated statements of operations.

Impairment of Long-Lived Assets

The Company evaluates its long-lived assets, including property and equipment and right-of-use assets, for indications of possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparison of the carrying amounts to the future undiscounted cash flows attributable to these assets. Should impairment exist, the impairment would be measured as the amount by which the carrying amount of the assets exceeds the fair value of those assets. The Company recorded $5.7 million in impairment charges during 2018 and $2.2 million in impairment charges during 2019. Refer to Note 3 for further details.

Leases

The Company adopted ASU 2016-02, Leases (Topic 842) as of January 1, 2019. The Company classifies leases as either operating or finance leases at inception and as necessary at modification. Leased assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. The Company does not obtain and control its right to use the identified asset until the lease commencement date. Although it may have a right and an obligation to exchange lease payments for a leased asset from the date of inception, the Company is unlikely to have an obligation to make lease payments before the asset is made available for use; therefore, lease classification, recognition, and measurement are determined at the lease commencement date.

Operating leases are included in operating lease right-of-use (ROU) assets, and operating lease liabilities on the Company’s consolidated balance sheets. Operating lease ROU assets and liabilities are recognized at lease commencement date based on the present value of lease payments over the lease term. When readily determinable, the Company uses the rate implicit in the lease to discount lease payments; however, when the rate is not readily determinable, the Company uses the incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The incremental borrowing rate is the rate of interest that the Company would have to pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term and in a similar economic environment. The operating lease ROU asset also includes any initial direct costs, lease payments made prior to lease commencement, and lease incentives received. Variable lease payments are expensed as incurred and are not included within the ROU asset and lease liability calculation. Variable lease payments primarily include reimbursements of costs incurred by lessors for common area maintenance and utilities. The Company’s lease terms are the noncancelable period including any rent-free periods provided by the lessor and may include options to extend or terminate the lease when it is reasonably certain that it will exercise that option. At lease inception, and upon modification or remeasurement, the Company estimates the lease term based on its assessment of extension and termination options that are reasonably certain to be exercised. Lease cost for lease payments is recognized on a straight-line basis over the lease term. The Company has certain lease agreements with lease and non-lease components, which are accounted for separately. For these agreements, lease payments are allocated between the lease- and non-lease components based on the relative stand-alone price of these components.

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Finance leases are included in property and equipment, other current liabilities, and other long-term liabilities on the Company’s consolidated balance sheets. Property and equipment under finance leases is generally amortized over the lease term and is included in depreciation expense. The interest on the finance lease liabilities is included in interest expense.

The Company does not recognize ROU assets and lease liabilities for short-term leases, which have a lease term of twelve months or less and do not include an option to purchase the underlying asset that the Company is reasonably certain to exercise. Lease cost for short-term leases is recognized on a straight-line basis over the lease term.

Accrued Clinical Studies and Research and Development Expenses

The Company accrues for the estimated costs of research and development activities conducted by third-party service providers that are conducting clinical studies. The Company records the estimated costs of research and development activities based upon the estimated amount of services provided and includes these costs in accrued liabilities and accrued liabilities—related parties in the consolidated balance sheets and within research and development and research and development—related parties expenses in the consolidated statements of operations. These costs are a significant component of research and development expenses. The Company accrues for these costs based on factors such as estimates of the work completed and in accordance with agreements established with third-party service providers. The Company makes judgments and estimates in determining the accrued liabilities balance in each reporting period.

Research and Development and Research and Development—Related Parties

Research and development and research and development—related parties expenses include costs incurred to develop the Company’s technology (prior to establishing technological feasibility), collect clinical samples, and conduct clinical studies to develop and support the Company’s investigational multi-cancer test. These costs consist of personnel costs, including salaries, benefits, and stock-based compensation expense associated with the Company’s research and development personnel, laboratory supplies, consulting costs, costs associated with setting up and conducting clinical studies at domestic and international sites, and allocated overhead expenses including rent, information technology, and equipment depreciation. The Company expenses both internal and external research and development costs in the periods in which they are incurred. Research and development—related parties expenses are further discussed in Note 12, Related-Party Transactions. Nonrefundable advance payments for goods and services that will be used or rendered in future research and development activities are deferred and recognized as expense in the period in which the related goods are delivered or services are performed.

Redeemable Convertible Preferred Stock

The Company records the redeemable convertible preferred stock at fair value on the dates of issuance, net of issuance costs. The Company classifies its redeemable convertible preferred stock outside of stockholders’ deficit on the consolidated balance sheets because, in the event of certain “liquidation events” that are not solely within the Company’s control, the shares would become redeemable at the option of the holders. The Company did not adjust the carrying values of the redeemable convertible preferred stock to the deemed liquidation values of such shares since a liquidation event was not probable at either of the balance sheet dates. Subsequent adjustments to increase or decrease the carrying values to the ultimate liquidation values will be made only if and when it becomes probable that such a liquidation event will occur.

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Stock-Based Compensation Expense

Employee stock-based compensation expense is measured at the grant date based on the fair value of the award. For awards with service-based vesting conditions, the portion of the award that is ultimately expected to vest is recognized as an expense on a straight-line basis over the requisite service period, which is generally the vesting period. The vesting period is generally four years.

The Company determines the fair value of equity awards as follows:

Stock Options: In determining the fair value of the stock-based compensation expense for awards granted under the 2016 Equity Incentive Plan and non-plan incentive awards, the Company uses the Black-Scholes option-pricing model and a Monte Carlo simulation model, which require the input of subjective assumptions. These assumptions include: the fair value of common stock, the estimated length of time employees will retain their vested stock options before exercising them (expected term), the estimated volatility of the Company’s common stock price over the expected term (expected volatility), the risk-free interest rate, and expected dividends. Changes in the following assumptions can materially affect the estimate of stock-based compensation expense:

Expected Term—For awards with service-based vesting conditions, the expected term of stock options represents the period the stock options are expected to remain outstanding and is calculated using the simplified method, due to limited history, which calculates the expected term as the midpoint of the contractual term of the awards and the vesting period. For awards with performance-based vesting conditions, the Company evaluates the award’s service period, contractual term, and its expectations of the projected timing of achievement of milestones in estimating the expected term.

Expected Volatility—As there has been no public market for the Company’s common stock to date, and thus the Company does not have any trading history of its common stock, the expected volatility is estimated based on the average volatility for comparable publicly-traded companies over a period equal to the expected term of the stock option grants. The comparable companies are chosen based on their similar size, stage in the life cycle, or area of specialty.

Risk-Free Interest Rate—The risk-free interest rate is based on the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining term equivalent to the expected term of a stock award.

Expected Dividends—The Company has not paid dividends on its common stock and does not anticipate paying any dividends on its common stock in the near future.

Fair Value of Common Stock—Given the absence of a public trading market, the Company’s board of directors consider numerous objective and subjective factors to determine the fair value of the common stock at each grant date. These factors include, but are not limited to: (i) the most recently available valuations of the common stock performed at periodic intervals by an independent third-party valuation firm; (ii) the prices for the redeemable convertible preferred stock sold to outside investors; (iii) the Company’s capital structure, including the rights and preferences of the Company’s various classes of equity, including the redeemable convertible preferred stock relative to the common stock; (iv) the Company’s stage of development and commercialization as well as developments in the business; (v) the lack of marketability of the common stock for a privately-held company; (vi) the likelihood of achieving a liquidity event for the Company’s shares of common stock, such as an IPO or sale of the Company, given prevailing market conditions; (vii) the Company’s historical operating results; and (viii) valuations of comparable public companies.

The Company accounts for stock-based compensation arrangements with non-employees using a fair value approach. The Company believes that for stock options issued to non-employees, the fair

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value of the stock option is more reliably measurable than the fair value of the services rendered. Therefore, the Company estimates the fair value of non-employee stock options using a Black-Scholes option-pricing model with appropriate inputs. Prior to the early adoption of ASU No. 2018-07, Stock Compensation (Topic 718): Improvements to Nonemployee Share- Based Payment Accounting, on January 1, 2018, the estimated fair value of non-employee stock options was remeasured over the vesting period as earned. Subsequent to the early adoption of ASU No. 2018-07, stock-based compensation arrangements with non-employees are accounted for in the same manner as stock-based compensation arrangements with employees, and are no longer remeasured every reporting period.

The Company recognizes stock-based compensation expense for awards that contain performance-based and performance- and market-based conditions using the accelerated attribution method when management determines it is probable that the performance condition will be satisfied. For awards with performance- and market-based conditions, the Company uses a Monte Carlo simulation to determine the fair value at the grant date and recognizes stock-based compensation expense over the derived service period when it becomes probable that the performance- based condition will be met. Under the Monte Carlo simulation, stock returns are simulated for the Company to estimate the payouts established by the vesting conditions of the awards and an estimated time that the awards will vest. The assumptions used in the Monte Carlo simulation include: the fair value of common stock, estimating the length of time employees will retain their vested stock options before exercising them (expected term), the estimated volatility of the Company’s common stock price over the expected term (expected volatility), the risk-free interest rate and expected dividends.

The Company grants certain awards that may be settled in fully vested shares of common stock or in cash, at the Company’s election. These awards are accounted for as liability-classified awards because the dollar value of the awards is fixed and the number of shares is variable and is based on the per-share common stock value at the time the underlying performance- and market-based conditions are satisfied. For these awards, once the performance condition is deemed probable, the liability is remeasured on each reporting date using the Monte Carlo simulation until the awards vest. If the Company issues common stock, the liability is remeasured and then reclassified to additional paid-in capital, with a corresponding charge (or credit) to stock-based compensation expense.

Restricted Stock Units (RSUs) and Restricted Stock Awards (RSAs): The fair values of the RSUs and RSAs were determined based on the fair value of the Company’s common stock on the grant date.

Beginning in 2019, the Company granted RSUs that generally vest upon the completion of service-based conditions. The Company recognizes stock-based compensation expense over the requisite service period.

Provision for (Benefit from) Income Taxes

The Company records income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the consolidated financial statements or tax returns. Deferred tax assets and liabilities are measured using enacted tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled.

The Company reduces deferred tax assets, if necessary, by a valuation allowance if it is more likely than not that the Company will not realize some or all of the deferred tax assets. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and recent results of operations.

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The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The Company recognizes interest and penalties related to uncertain tax positions within the provision (benefit) for income taxes.

Foreign Currency

The functional currencies of the Company’s foreign subsidiaries are the U.S. Dollar, British Pound, and the Hong Kong Dollar. Adjustments resulting from translating the financial statements of the United Kingdom and Hong Kong subsidiaries into U.S. Dollars are recorded as a component of other comprehensive loss in the consolidated statements of comprehensive loss. Monetary assets and liabilities denominated in a foreign currency are translated into U.S. Dollars at the exchange rate on the balance sheet date. Expenses are translated at the weighted-average exchange rates during the period. Equity transactions are translated using historical exchange rates.

Comprehensive Loss

Comprehensive loss includes net loss and certain changes in stockholders’ deficit that are excluded from net loss, primarily unrealized losses (gains) on the Company’s marketable securities and foreign currency translation adjustments.

Net Loss Per Share Attributable to Class A and Class B Common Stockholders

Basic and diluted net loss per share attributable to Class A and Class B common stockholders are presented in conformity with the two-class method required for participating securities. The Company considers all series of its redeemable convertible preferred stock and early exercised stock options and restricted stock awards to be participating securities. Under the two-class method, the net loss attributable to Class A and Class B common stockholders is not allocated to the redeemable convertible preferred stock as the holders of the Company’s redeemable convertible preferred stock do not have a contractual obligation to share in losses. Basic net loss per share attributable to Class A and Class B common stockholders is calculated by dividing the net loss adjusted to include deemed dividends paid to the Company’s preferred stockholders and accretion to redemption value of the redeemable common stock awards, to the extent both impact accumulated deficit, by the weighted-average number of shares of Class A and Class B common stock outstanding during the period, less shares subject to repurchase. Diluted net loss per share attributable to Class A and Class B common stockholders is the same as basic net loss per share, since the effects of potentially dilutive securities are antidilutive given the net loss attributable to Class A and Class B common stockholders for each period presented.

Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-02, Leases (Topic 842), and subsequent amendments, to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous U.S. GAAP. ASU 2016-02 requires a lessee to recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term on the balance sheet. ASU 2016-02 is effective for financial years beginning after December 15, 2018 (including interim periods within those periods) using a modified retrospective approach, and early adoption is permitted.

On January 1, 2019, the Company adopted Topic 842, as amended, under the modified retrospective transition approach, with no cumulative-effect adjustment on the opening balance of accumulated deficit as of the effective date (the effective date method). Under the effective date

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method, financial results reported in periods prior to January 1, 2019 are unchanged. The Company elected the following as part of the adoption:

• the package of practical expedients which allows for not reassessing (1) whether existing contracts contain leases, (2) the lease classification for existing leases, and (3) whether existing initial direct costs meet the new definition;

• not to recognize ROU assets and lease liabilities for short-term leases, which have a lease term of twelve months or less and do not include an option to purchase the underlying asset that the Company is reasonably certain to exercise.

The cumulative effect of the adjustments made to the Company’s consolidated balance sheet as of the adoption date was primarily is detailed as follows:

	December 31, 2018		Effect of the Adoption of Topic 842			January 1, 2019
	(in thousands)
Assets:
Operating lease right-of-use assets	$	—	$	40,389		$	40,389
Total assets	$	686,845	$	40,389		$	727,234
Liabilities:
Operating lease liabilities, current portion	$	—	$	4,935		$	4,935
Other current liabilities		1,785		(195	)		1,590
Deferred rent, net of current portion		6,909		(6,909	)		—
Operating lease liabilities, net of current portion		—		42,558			42,558
Total liabilities	$	86,473	$	40,389		$	126,862

The adoption of the standard did not result in a material impact on the Company’s consolidated statements of operations and had no impact on the Company’s consolidated statements of cash flows. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases and the related disclosures included in Note 6 to the financial statements, while the Company’s accounting for finance leases remained substantially unchanged.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), as well as a further amendment in ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. ASU 2014-09 establishes a principle for recognizing revenue upon the transfer of promised goods or services to customers, in an amount that reflects the expected consideration received in exchange for those goods or services. It also provides guidance on the recognition of costs related to obtaining and fulfilling customer contracts. This guidance is effective for annual reporting periods (including interim periods within those years) beginning after December 15, 2017. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. The Company adopted this ASU on January 1, 2018. There was no material impact to the consolidated financial statements upon adoption.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments–Credit Losses (Topic 326). ASU 2016-13 requires measurement and recognition of expected credit losses for financial assets. This guidance will become effective for the Company beginning in the first quarter of 2020 and must be adopted using a modified retrospective approach, with certain exceptions. The Company does not anticipate that the adoption of this standard will have a material effect on its consolidated financial statements.

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In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230), which requires amounts generally described as restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling the total beginning and ending amounts for the periods shown on the consolidated statements of cash flows. ASU 2016-08 is effective for financial years beginning after December 15, 2017 (including interim periods within those periods) using a retrospective transition method for each period presented. The Company adopted this standard on January 1, 2018 using a retrospective transition method. There was no material impact to the consolidated financial statements upon adoption.

In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting, which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. ASU 2017-09 is effective for annual and interim periods beginning after December 15, 2017. The Company adopted this standard on January 1, 2018. There was no material impact to the consolidated financial statements upon adoption.

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260): Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815), which changes the classification analysis of certain equity-linked financial instruments with down round features. Under historical U.S. GAAP, an equity-linked financial instrument with a down round feature that otherwise was not required to be classified as a liability under ASC 480 was evaluated under the ASC 815, Derivatives and Hedging, to determine whether it met the definition of a derivative (and was therefore measured at fair value at each reporting period). Under ASU 2017-11, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock under ASC 815. Accordingly, these financial instruments are no longer measured at fair value at each reporting period. ASU 2017-11 also requires entities that calculate earnings per share to recognize the effect of the down round feature when it is triggered (at this time, the effect is treated as a dividend and as a reduction of income available to common stockholders in basic earnings per share). It is effective for annual and interim periods beginning after December 15, 2018 and early adoption is permitted. The Company adopted this standard on January 1, 2019. The impact of the adoption of this ASU did not have a material impact on its consolidated financial statements.

In June 2018, the FASB issued ASU 2018-07, Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The ASU is intended to reduce the cost and complexity and to improve financial reporting for nonemployee share-based payments. The ASU expands the scope of Topic 718, Compensation—Stock Compensation, which currently only includes share-based payments for employees, to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. This ASU is effective for annual and interim periods beginning after December 15, 2018. Early adoption is permitted but may take place no earlier than a company’s adoption date of Topic 606, Revenue from Contracts with Customers. The Company early adopted this standard on January 1, 2018. There was no material impact to the consolidated financial statements upon adoption.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. The ASU improves the effectiveness of fair value measurements disclosures and modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, based on the concepts in the FASB Concepts Statement, Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial Statements, including the consideration of costs and benefits. This ASU is

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effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted. The Company does not anticipate that the adoption of this ASU will have a material impact on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40), Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU 2018-15 amends current guidance to align the accounting for costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing costs associated with developing or obtaining internal-use software. Capitalized implementation costs must be expensed over the term of the hosting arrangement and presented in the same line item in the statement of income as the fees associated with the hosting element (service) of the arrangement. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company is planning to adopt the standard using the prospective transition method and will begin capitalizing implementation costs as of January 1, 2020.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 modifies ASC 740 to simplify the accounting for income taxes. The Company has elected to early adopt the amendments effective January 1, 2019. The impact to the consolidated financial statements upon adoption was immaterial.

NOTE 3. BALANCE SHEET COMPONENTS

Property and Equipment, Net

Property and equipment, net consisted of the following:

	Useful Life (in Years)		As of December 31,
			2018			2019
			(in thousands)
Laboratory equipment		3 to 5	$	23,124		$	23,157
Computer hardware		3 to 5		4,363			4,994
Computer software		3 to 5		257			257
Furniture and fixtures		5		2,026			2,021
Leasehold improvements		Lease term		23,295			21,931
Construction-in-process				241			215
Property and equipment, gross				53,306			52,575
Less accumulated depreciation and amortization				(20,267	)		(28,150	)
Total property and equipment, net			$	33,039		$	24,425

Included within property and equipment, net is $3.4 million and $1.3 million of laboratory equipment purchased from related parties as of December 31, 2018 and 2019, respectively.

In June 2018, the Company concluded that certain laboratory equipment (some of which were subsequently disposed of) did not have remaining utility due to ongoing business changes and accordingly recorded an impairment charge of $4.0 million in research and development expenses on the consolidated statements of operations. In addition, effective December 31, 2018, the Company changed its estimate of the useful life of the leasehold improvements in its Hong Kong facilities. In connection with the decision to exit the Hong Kong facility, the Company recorded an impairment charge of $1.7 million, primarily in research and development expenses, in connection with leasehold improvements in its Hong Kong facilities.

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During 2019, primarily in connection with the decision to end the Company’s lease in Hong Kong, the Company recorded an impairment charge of $0.9 million relating to laboratory equipment, computer hardware and furniture and fixtures, in research and development expenses.

The Company recorded $14.1 million and $10.3 million of depreciation expense during 2018 and 2019 respectively, of which $1.6 million and $0, respectively, related to assets under capital leases. For more information on the capital leases, see Note 7, Commitments and Contingencies.

Accrued Liabilities and Accrued Liabilities—Related Parties

Accrued liabilities and accrued liabilities–related parties consist primarily of amounts owed to vendors, employees, and professional service firms and are based on the Company’s best estimate. Accrued liabilities and accrued liabilities–related parties consisted of the following:

	As of December 31,
	2018		2019
	(in thousands)
Accrued compensation expenses	$	14,502	$	14,889
Accrued legal and professional expenses		3,051		4,306
Accrued clinical studies expenses		12,219		5,119
Accrued research and development expenses		2,210		3,494
Accrued construction-in-process		207		23
Accrued research and development expenses—related parties		21,209		—
Accrued other expenses		4,772		3,753
Total accrued liabilities and accrued liabilities—related parties	$	58,170	$	31,584

NOTE 4. FAIR VALUE MEASUREMENTS

The following table represents the fair value hierarchy for the Company’s financial assets measured at fair value on a recurring basis as of December 31, 2018 and December 31, 2019:

	As of December 31, 2018
	Level 1		Level 2		Level 3		Total
	(in thousands)
Cash equivalents:
Money market funds	$	33,853	$	—	$	—	$	33,853
Corporate debt securities		—		5,999		—		5,999
Commercial paper		—		3,983		—		3,983
Short-term marketable securities:
U.S. government treasuries		49,879		—		—		49,879
U.S. government agency securities		—		14,873		—		14,873
Corporate debt securities		—		266,872		—		266,872
Commercial paper		—		214,632		—		214,632
Total marketable securities		49,879		496,377		—		546,256
Total	$	83,732	$	506,359	$	—	$	590,091

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	As of December 31, 2019
	Level 1		Level 2		Level 3		Total
			(in thousands)
Cash equivalents:
Money market funds	$	58,291	$	—	$	—	$	58,291
Corporate debt securities		—		21,001		—		21,001
Commercial paper		—		4,988		—		4,988
Short-term marketable securities:
U.S. government treasuries		37,533		—		—		37,533
U.S. government agency securities		—		7,504		—		7,504
Corporate debt securities		—		236,234		—		236,234
Commercial paper		—		119,884		—		119,884
Long-term marketable securities:
Corporate debt securities		—		5,435		—		5,435
U.S. government agency securities		—		8,498		—		8,498
Total marketable securities		37,533		377,555		—		415,088
Total	$	95,824	$	403,544	$	—	$	499,368

There were no transfers between the fair value measurement levels during 2018 and 2019.

NOTE 5. MARKETABLE SECURITIES

All marketable securities as of December 31, 2018 and 2019 are considered available-for-sale, and the amortized costs, unrealized holding gains or losses, and the fair values of the Company’s marketable securities by major security type are summarized in the table below:

	As of December 31, 2018
	Amortized Cost		Unrealized Holding Gains		Unrealized Holding Losses			Aggregate Fair Value
			(in thousands)
Cash equivalents:
Money market funds	$	33,853	$	—	$	—		$	33,853
Corporate debt securities		5,999		—		—			5,999
Commercial paper		3,983		—		—			3,983
Total cash equivalents		43,835		—		—			43,835
Short-term marketable securities:
U.S. government treasuries	$	49,891	$	—	$	(12	)	$	49,879
U.S. government agency securities		14,899		—		(26	)		14,873
Corporate debt securities		267,165		16		(309	)		266,872
Commercial paper		214,632		—		—			214,632
Total short-term marketable securities		546,587		16		(347	)		546,256
Total marketable securities	$	590,422	$	16	$	(347	)	$	590,091

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	As of December 31, 2019
	Amortized Cost		Unrealized Holding Gains		Unrealized Holding Losses			Aggregate Fair Value
	(in thousands)
Cash equivalents:
Money market funds	$	58,291	$	—	$	—		$	58,291
Corporate debt securities		21,001		—		—			21,001
Commercial paper		4,988		—		—			4,988
Total cash equivalents		84,280		—		—			84,280
Short-term marketable securities:
U.S. government treasuries	$	37,497	$	37	$	(1	)	$	37,533
U.S. government agency securities		7,499		5		—			7,504
Corporate debt securities		236,012		259		(37	)		236,234
Commercial paper		119,884		—		—			119,884
Total short-term marketable securities		400,892		301		(38	)		401,155
Long-term marketable securities:
Corporate debt securities		5,439		—		(4	)		5,435
U.S. government agency securities		8,500		—		(2	)		8,498
Total long-term marketable securities		13,939		—		(6	)		13,933
Total marketable securities	$	499,111	$	301	$	(44	)	$	499,368

Interest income related to the Company’s cash equivalents and available-for-sale investments included in interest income, net, was $12.3 million and $11.7 million during 2018 and 2019, respectively.

The following table summarizes the maturities of the Company’s available-for-sale securities, by contractual maturity, as of December 31, 2019.

	As of December 31, 2019
	Amortized Cost		Aggregate Fair Value
	(in thousands)
Mature in less than one year	$	485,172	$	485,435
Mature in one to two years		13,939		13,933
Total	$	499,111	$	499,368

The following table summarizes the Company’s available-for-sale securities that were in a continuous unrealized loss position for less than 12 months, but were not deemed to be other-than-temporarily impaired, as of December 31, 2018 and 2019.

	As of December 31,
	2018					2019
	Aggregate Fair Value		Aggregate Unrealized Losses			Aggregate Fair Value		Aggregate Unrealized Losses
	(in thousands)
U.S. government treasuries	$	39,898	$	(12	)	$	7,542	$	(1	)
U.S. government agency securities		14,874		(26	)		8,498		(2	)
Corporate debt securities		238,750		(309	)		62,395		(41	)
Total	$	293,522	$	(347	)	$	78,435	$	(44	)

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As of December 31, 2018 and 2019, some of the Company’s marketable securities were in an unrealized loss position. The Company held a total of 84 and 23 positions that were in an unrealized loss position as of December 31, 2018 and 2019, respectively. The Company determined that the gross unrealized losses were temporary in nature and related primarily to interest rate shifts rather than significant changes in the underlying credit quality of the securities that the Company holds. The Company has the ability to hold all marketable securities that have been in a continuous loss position until maturity or recovery, thus there has been no recognition of any other-than-temporary impairment during 2018 and 2019.

The Company’s short-term marketable securities have an effective maturity date of less than 12 months, and the long-term marketable securities have an effective maturity of greater than 12 months and less than 16 months.

NOTE 6. LEASES

The Company has entered into operating and finance leases for facilities and research and development equipment. Both operating and finance leases have remaining lease terms which range from 1 year to 7 years, and often include one or more options to renew. These renewal terms can extend the lease term from 1 to 5 years and are included in the lease term when it is reasonably certain that the Company will exercise the option. One lease provides the option to terminate the lease under certain conditions with three months’ notice. The Company does not expect to exercise this termination option. The exercise of lease renewal and termination options is at the Company’s sole discretion. The Company also has variable lease payments that are primarily comprised of common area maintenance and utility charges.

During the twelve months ended December 31, 2019, in connection with the decision to exit its Hong Kong facility, the Company recorded an impairment charge of $1.3 million in research and development expenses relating to operating lease right-of-use assets. In November 2019, the Company entered into a surrender agreement to terminate the operating lease of the Hong Kong facility, which released the Company of its residual value guarantees, which amounted to $0.6 million and was recognized as an offset to general and administrative expenses.

Supplemental balance sheet information related to leases was as follows:

	As of December 31, 2019
	(in thousands)
Operating leases:
Operating lease right-of-use assets	$	35,036
Operating lease liabilities, current portion	$	4,604
Operating lease liabilities, net of current portion		36,638
Total operating lease liabilities	$	41,242
Finance leases:
Property and equipment, gross		4,920
Accumulated depreciation		(4,920	)
Property and equipment, net	$	—
Other current liabilities	$	800
Finance lease payable, net of current portion		—
Total finance lease liabilities	$	800

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Supplemental cash flow information related to leases was as follows:

	Year Ended December 31, 2019
	(in thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	7,981
Financing cash flows from finance leases		1,559

The components of lease expense were as follows:

	Year Ended December 31, 2019
	(in thousands)
Operating leases cost	$	7,215
Finance leases cost:
Amortization of leased assets		32
Interest on lease liabilities		107
Short-term leases cost		—
Variable leases cost		3,234
Total leases cost	$	10,588
Weighted-average remaining lease term (years):
Operating lease		6.87
Finance lease		0.50
Weighted-average discount rate:
Operating leases		7.0	%
Finance leases		5.1	%

As of December 31, 2019, no assets were obtained in exchange for lease obligations related to operating leases or finance leases.

As of December 31, 2019, undiscounted future lease payments for each of the next five years and thereafter are as follows:

Year Ending December 31,	Operating Leases			Finance Leases			Total
	(in thousands)
2020	$	6,780		$	812		$	7,592
2021		7,544			—			7,544
2022		7,705			—			7,705
2023		7,706			—			7,706
2024		7,889			—			7,889
Thereafter		14,359			—			14,359
Total lease payments		51,983			812			52,795
Less: interest		(10,741	)		(12	)		(10,753	)
Total	$	41,242		$	800		$	42,042

As of December 31, 2019, the Company does not have additional operating and finance leases that have not yet commenced.

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ASC 840 Disclosures

The Company elected modified retrospective transition approach and is required to present previously disclosed information under the prior accounting standards for leases. Total minimum lease payments as of December 31, 2018 are as follows:

Year Ending December 31,	Operating Leases		Finance Leases		Total
	(in thousands)
2019	$	7,798	$	1,675	$	9,473
2020		7,802		850		8,652
2021		7,228		—		7,228
2022		7,447		—		7,447
2023		7,672		—		7,672
Thereafter		22,066		—		22,066
Total	$	60,013	$	2,525	$	62,538

Total rent expense was $6.6 million and $7.2 million during 2018 and 2019, respectively.

The Company leased lab equipment totaling $6.0 million in 2016 and did not enter into any additional capital leases in 2018 or 2019.

NOTE 7. COMMITMENTS AND CONTINGENCIES

As of December 31, 2019, the Company’s future non-lease commitments over the next five years and thereafter were as follows:

	Minimum Royalties		Purchase Commitments		Total
	(in thousands)
2020	$	565	$	845	$	1,410
2021		570		—		570
2022		575		—		575
2023		1,075		—		1,075
2024		1,075		—		1,075
Thereafter		6,750		—		6,750
Total commitments	$	10,610	$	845	$	11,455

Minimum Royalty Commitments

The Company has certain minimum royalty commitments associated under licensing agreements related to its research efforts.

Purchase Commitments

The Company has open purchase orders primarily related to the purchase of laboratory supplies in the normal course of business.

Contingencies

The Company responds to claims arising in the ordinary course of business. If necessary, the Company will accrue estimates of the amounts it expects to pay upon resolution of such matters, and

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such amounts will be included in other current liabilities. Should the Company not be able to secure the terms it expects, these estimates may change and will be recognized in the period in which they are identified.

Legal Matters

The Company is subject to various claims, complaints, and legal actions that arise from time to time. The Company does not believe it is a party to any currently pending or threatened legal proceedings that will result in a material adverse effect on its business. There can be no assurance that existing or future legal proceedings arising in the ordinary course of business or otherwise will not have a material adverse effect on the Company’s business, financial position, results of operations, or cash flows.

Indemnification

The Company has agreed to indemnify its directors and officers for certain events or occurrences while the director or officer is, or was serving, at the Company’s request in such capacity. The indemnification period covers all pertinent events and occurrences during the director’s or officer’s service. The maximum potential amount of future payments the Company could be required to make under the applicable indemnification agreements is not specified in the agreements; however, the Company has director and officer insurance coverage that reduces its exposure and enables the Company to recover a portion of any future amounts paid. The Company believes the estimated fair value of these indemnification agreements in excess of applicable insurance coverage is minimal.

The Company enters into standard indemnification arrangements in the ordinary course of business. Pursuant to these arrangements, the Company indemnifies, holds harmless, and agrees to reimburse the indemnified parties for losses suffered or incurred by the indemnified party, in connection with any trade secret, copyright, patent or other intellectual property infringement claim by any third party with respect to the Company’s technology. The term of these indemnification agreements is generally perpetual after the execution of the agreement. The maximum potential amount of future payments the Company could be required to make under these arrangements is not determinable. The Company has not incurred costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes the estimated fair value of these agreements is minimal.

NOTE 8. COMMON STOCK

The Company has two classes of common stock: Class A and Class B. The voting rights per share of Class A and Class B are 1:1 and 10:1, respectively. Common stockholders are entitled to dividends when and if declared by the board of directors subject to the prior rights of the preferred stockholders. As of December 31, 2019, no dividends have been declared. The shares of Class B common stock are convertible into shares of Class A common stock at a ratio of 0.44 shares of Class A common stock to 0.42 shares of Class B common stock.

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As of December 31, 2019, the Company has reserved shares of Class A common stock for issuance upon conversion of the redeemable convertible preferred stock and exercise of options. No shares of Class B common stock have been reserved. The Company has reserved shares of Class A common stock, on an as converted basis, for issuance as follows:

	Class A Shares
	(in thousands)
Conversion of Series A redeemable convertible preferred stock		85,000
Conversion of Series B redeemable convertible preferred stock		309,257
Conversion of Series C redeemable convertible preferred stock		63,145
Conversion of Series D redeemable convertible preferred stock		31,323
Conversion of Class B common stock		26,179
Options and awards outstanding for the 2016 Equity Incentive Plan		94,300
Non-Plan Incentive Awards		26,525
Reserved for future grants		23,717
Total		659,446

NOTE 9. REDEEMABLE CONVERTIBLE PREFERRED STOCK

The following tables represent the redeemable convertible preferred stock as of December 31, 2018 and 2019:

	As of December 31, 2018
	Shares Authorized		Original Issuance Price		Shares Issued and Outstanding		Net Proceeds		Liquidation Value
			(in thousands, except share and per share data)
Series A		85,000,000		1.0000		85,000,000	$	120,000	$	85,000
Series B		309,256,591		4.0085		309,256,591		1,085,404		1,239,655
Series C		63,144,601		4.7510		63,144,600		299,557		300,000
Total		457,401,192				457,401,191	$	1,504,961	$	1,624,655

	As of December 31, 2019
	Shares Authorized		Original Issuance Price		Shares Issued and Outstanding		Net Proceeds		Liquidation Value
			(in thousands, except share and per share data)
Series A		85,000,000		1.0000		85,000,000	$	120,000	$	85,000
Series B		309,256,591		4.0085		309,256,591		1,085,404		1,239,655
Series C		63,144,600		4.7510		63,144,600		299,557		300,000
Series D		48,942,833		5.1080		31,323,413		159,836		160,000
Total		506,344,024				488,724,604	$	1,664,797	$	1,784,655

During 2018, the Company issued 63,144,600 shares of Series C redeemable convertible preferred stock for gross proceeds of $300.0 million, less $0.4 million of issuance costs. The Series C redeemable convertible preferred stock has substantially similar terms as the Company’s Series A and B redeemable convertible preferred stock except that it has a liquidation preference of $4.751 per share.

During 2019, the Company issued 31,323,413 shares of Series D redeemable convertible preferred stock for gross proceeds of $160.0 million, less $0.2 million of issuance costs. The Series D redeemable convertible preferred stock has substantially similar terms as the Company’s Series A, B, and C redeemable convertible preferred stock except that it has a liquidation preference of $5.1080 per share.

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Redemption

As of December 31, 2018 and December 31, 2019, the Company classified the convertible preferred stock as redeemable on the consolidated balance sheets. Upon the occurrence of certain change-in-control events that may be outside the Company’s control, including liquidation, sale, or transfer of the Company, holders of the convertible preferred stock could cause a redemption of their stock for cash. The preferred stock does not have a mandatory redemption date.

Conversion

Each share of preferred stock is convertible, at the option of the holder, according to a conversion ratio, which is subject to adjustment for dilutive share issuances as described in the next paragraph. The total number of shares of common stock into which the preferred stock may be converted is determined by dividing the then-applicable conversion price by the initial conversion price. The preferred stock automatically converts into shares of Class A common stock at the then-applicable conversion price in the event of an underwritten public offering of shares of common stock with aggregate gross proceeds of no less than $150 million (Qualifying IPO), provided that, prior to November 27, 2021 (24 months after the initial closing date of November 27, 2019), such automatic conversion shall also require either (i) the per share price of the Qualifying IPO to be at least $5.1080 per share (i.e., the Series D preferred stock original issue price) or (ii) the vote of the holders of a majority of the combined Series C and D preferred stock. The preferred stock also automatically converts into shares of Class A common stock at the then- applicable conversion price upon the vote of a majority of the holders of preferred stock and, if prior to November 27, 2021, the vote of the holders of two-thirds of the combined Series C and D preferred stock shall also be required. As of December 31, 2019, each share of Series A, B, C, and D preferred stock was convertible into one share of Class A common stock.

Subject to certain exceptions, including issuances of shares to employees or consultants pursuant to a stock option plan approved by the board of directors and issuances of shares to lenders or strategic partners or in connection with the acquisition of a company or technology, in each case approved by the board of directors, the conversion price of each applicable series of preferred stock is subject to adjustment to prevent dilution in the event that the Company issues additional shares at a purchase price less than the then-applicable conversion price.

Dividends

Any dividends paid in any fiscal year will be paid among the holders of redeemable convertible preferred stock and common stock then outstanding based on preferences and on an if-converted basis. Dividends are noncumulative, and none were declared as of December 31, 2018 or December 31, 2019.

Voting

Each share of redeemable convertible preferred stock is entitled to the number of votes equal to the number of shares of Class A common stock into which such shares could be converted. Holders of redeemable convertible preferred stock and common stock vote as a single class.

Liquidation Preference

In the event of any liquidation, dissolution or winding up of the Company, either voluntary or involuntary, including a merger, acquisition, or sale of assets where the holders of common stock and

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preferred stock own less than a majority of the resulting voting power of the surviving entity (Liquidation Transaction), the holders of preferred stock will receive in preference to the holders of common stock, an amount per share equal to the liquidation preference, plus any accrued but unpaid dividends. After payment of the liquidation preference to the holders of the preferred stock, the remaining assets of the Company are available for distribution to the holders of common stock on a pro rata basis. The vote of a majority of the holders the preferred stock can waive the liquidation preference; provided that, prior to November 27, 2021, the vote of the holders of two-thirds of the combined Series C and D preferred stock shall also be required to waive such liquidation preference. These liquidation features cause the Series A, B, C, and D preferred stock to be classified as mezzanine equity rather than as a component of stockholders’ deficit.

NOTE 10. STOCK INCENTIVE AWARDS

The Company grants awards under the 2016 Equity Incentive Plan (2016 Plan) as well as incentive awards not under the 2016 Plan (Non-Plan Equity Incentive Awards).

2016 Equity Incentive Plan

The Company’s board of directors adopted, and its stockholders approved, the Company’s 2016 Plan in January 2016. The 2016 Plan was amended on February 6, 2017, February 27, 2017, September 18, 2019, November 21, 2019, and November 25, 2019.

As of December 31, 2019, the Company had granted options or rights to purchase 134,890,768 shares of its Class A common stock and 24,989,397 shares of its Class B common stock under the Company’s 2016 Plan, of which options or rights to purchase 94,299,675 shares of Class A common stock and no shares of Class B common stock were outstanding. As of December 31, 2019, 23,717,119 shares of Class A common stock and no shares of Class B common stock remained available for future grants. The maximum contractual term of options is generally ten years.

The Company’s 2016 Plan allows for the grant of awards in the form of: (i) incentive stock options, (ii) non-qualified stock options; (iii) stock appreciation rights; (iv) RSAs; (v) RSUs; and (vi) unrestricted stock. Directors, employees, and consultants are eligible to participate in the 2016 Plan.

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Stock Option Activity—A summary of all stock option activity for the 2016 Plan during 2018 and 2019 is as follows:

				Class A
	Number of Shares Available for Grant			Number of Shares Underlying Outstanding Options			Weighted- Average Exercise Price Per Share		Weighted- Average Grant Date Fair Value Per Share		Weighted- Average Remaining Contractual Term (in Years)		Aggregate Intrinsic Value
	(in thousands, except years and per share data)
Balance as of January 1, 2018		25,572			21,567		$	0.39				9.24	$	732
Granted		(28,135	)		28,135			1.09	$	0.71
Exercised		—			(5,258	)		0.50
Repurchased		864			—			—
Forfeited		3,250			(3,250	)		0.42
Balance as of December 31, 2018		1,551			41,194			0.85				8.99		36,708
Award Authorized		63,058
Granted		(52,377	)		52,377			1.96		1.30
Exercised		—			(5,159	)		0.63
Repurchased		857			—			—
Forfeited		10,628			(10,628	)		1.55
Balance as of December 31, 2019		23,717			77,784			1.52				9.07		44,677
Options vested and expected to vest as of December 31, 2019		—			67,284			1.56				9.07		35,910
Options vested and exercisable as of December 31, 2019		—			15,662			0.71				7.67		21,673

Restricted Stock Unit Activity—A summary of all restricted stock unit activity for the 2016 Plan during 2019 was as follows:

	Class A Restricted Stock Units
	Restricted Stock Units Outstanding		Weighted- Average Grant Date Fair Value Per Share
	(in thousands, except per share data)
Unvested balance as of January 1, 2019		—		—
Granted		16,516	$	1.97
Vested		—		—
Forfeited		—		—
Unvested balance as of December 31, 2019		16,516		1.97

As of December 31, 2019, there was $29.5 million of total unrecognized compensation cost related to restricted stock units granted under the Company’s 2016 Plan. That cost is expected to be recognized over a weighted-average period of 2.94 years.

Awards with Service-Based Vesting Conditions Granted under the 2016 Plan

During 2018 and 2019, the Company granted 21,751,430 and 62,593,918 awards with service-based vesting conditions, respectively.

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During 2018 and 2019, the Company granted 21,751,430 and 46,077,816 options of Class A common stock under the 2016 Plan with only service-based vesting conditions, respectively. The fair value of these options granted during 2018 and 2019 was estimated using the Black-Scholes option-pricing model with the following weighted- average assumptions:

	Year Ended December 31,
	2018			2019
Expected term (in years)		6.01			5.94
Expected volatility		68.0	%		73.5	%
Risk-free interest rate		2.76	%		1.69	%
Expected dividend rate		—	%		—	%

The total grant date fair value of options that vested during 2018 and 2019 was $2.6 million and $7.0 million, respectively. The aggregate intrinsic value of options exercised during 2018 and 2019 was $3.2 million and $3.5 million, respectively. During 2019, the Company modified 3,271,768 options with service-based vesting conditions from the 2016 Plan. See “Modification of Stock Options.”

During 2019, of the 62,593,918 awards granted, 16,516,102 were RSUs of Class A common stock under the 2016 Plan. These RSUs have an expiration term of 10 years. 11,285,902 RSUs vest over a period of 3 years with two-thirds vesting upon the second anniversary of the vesting start date and the remaining one-third vesting at the third anniversary of the vesting start date. 5,230,200 RSUs vest over a period of 4 years with 25% vesting upon the first anniversary of the vesting start date and 1/16th vesting quarterly thereafter. The weighted-average grant date fair value per share for these RSUs was $1.97 and the aggregate grant date fair value was $32.6 million. None of these units vested during 2019.

Awards with Performance-Based Vesting Conditions Granted under the 2016 Plan

During 2016, the Company granted restricted stock awards of 5,714,286 shares of Class B common stock that vest upon satisfaction of performance or service-based conditions. Vesting, if achieved, will be based on the timing of certain transactions, including a qualified IPO, or upon completion of requisite service, whichever is earlier, provided, however, that a single transaction cannot result in vesting of more than 50% of the total restricted stock awards. The grant date fair value per share of these awards was $0.15 and the aggregate grant date fair value was $0.9 million. None of these awards vested during 2018 or 2019. Stock-based compensation expense of $0.2 million and $0.2 million was recognized during 2018 and 2019 respectively, for these awards.

During 2017, the Company granted options to purchase 4,180,021 shares of Class A common stock to the founders of Cirina Limited that vest upon satisfaction of performance- and service-based conditions. The options vest over a period of 4 years with 25% vesting upon the first anniversary of the grant date and 1/48th vesting at the end of each month thereafter. During 2017, a performance-based condition was satisfied upon a successful patent claim and as a result, vesting of one-third of these options was accelerated. During 2019, a second performance- based condition was satisfied upon a subsequent successful patent claim and as a result, vesting of the remaining options was accelerated. The grant date fair value per share of these options was $0.32 and the aggregate grant date fair value was $1.3 million. The total grant date fair value of options that vested during 2018 and 2019 was $0.5 million and $0.4 million, respectively. The aggregate intrinsic value of options exercised during, 2018 and 2019 was, $3.3 million and $2.3 million, respectively. Stock-based compensation expense of $0.4 million and $0.1 million was recognized during 2018 and 2019, respectively, for these options.

During 2018, the Company granted options to purchase 1,500,000 shares of Class A common stock that vest upon satisfaction of performance-based conditions. During 2018, 500,000 shares

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vested after the related performance-based condition was met, and stock-based compensation expense of $0.1 million was recognized for these vested options. In addition, 500,000 shares were forfeited due to the related performance-based condition not being met by December 31, 2018. The remaining 500,000 shares vest upon satisfaction of other performance-based conditions that are not yet considered probable of being met. The grant date fair value per share of these options was $0.26 and the aggregate grant date fair value was $0.4 million. The total grant date fair value of options that vested during 2018 and 2019 was $0.1 million and $0 respectively. None of these options were exercised in 2018 or 2019.

During 2019, the Company granted options to purchase 1,050,000 shares of Class A common stock that vest upon satisfaction of performance-based conditions. The grant date fair value per share of these options was $1.10 per share and the aggregate grant date fair value was $1.2 million. As of December 31, 2019, those shares were forfeited.

During 2019, the Company granted options to purchase 1,743,300 of Class A common stock to one of the Company’s executives. The options will commence vesting upon the consummation of the Company’s IPO, provided such IPO is consummated within 10 years from the grant date, over a period of four years, with 1/48th vesting upon each monthly anniversary of such vesting commencement date. The grant date fair value per share of these options was $1.69 and the aggregate grant date fair value was $3.0 million. As of December 31, 2019, no options have been exercised, no options have vested, and no stock-based compensation expense has been recognized for these awards as the performance-based conditions are not yet considered probable of being met.

During 2019, the Company granted options to purchase 3,506,222 of Class A common stock to two of the Company’s executives. The options will commence vesting upon the achievement of certain performance targets, provided such performance targets are met within 10 years from the grant date, over a period of three years, with 1/36th vesting upon each monthly anniversary of such vesting commencement date. The grant date fair value per share of these options was $1.69 and the aggregate grant date fair value was $5.9 million. As of December 31, 2019, no options have been exercised, no options have vested, and no stock-based compensation expense has been recognized for these awards as the performance-based conditions are not yet considered probable of being met.

The fair value of the Company’s awards with performance-based conditions granted under the 2016 Plan during 2018 and 2019 was estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions:

	Year Ended December 31,
	2018			2019
Expected term (in years)		5.57			9.45
Expected volatility		68.1	%		78.1	%
Risk-free interest rate		2.65	%		2.01	%
Expected dividend rate		—	%		—	%

Awards with Performance- and Market-Based Vesting Conditions Granted under the 2016 Plan

During 2018, the Company granted options to purchase 4,883,947 shares of Class A common stock that vest upon satisfaction of performance- and market-based conditions. The performance-based condition is satisfied upon the Company successfully executing an IPO of the Company’s common stock and achieving certain performance targets. The market-based condition is satisfied upon the Company maintaining certain market capitalization levels after the IPO. For these options, the Company uses a Monte Carlo simulation to determine the fair value at the grant date and the implied

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service period. The weighted-average grant date fair value per share for these options was $0.22 and the aggregate grant date fair value was $1.1 million. None of these options vested in 2018 or 2019. In 2018 and 2019, the Company did not recognize any stock-based compensation expense associated with these options as the achievement of the performance-based condition was not deemed to be probable. Of the 4,883,947 options, 4,400,000 options were modified and accounted for under the modification guidance. See “Modification of Stock Options.”

The fair value of the Company’s awards with performance- and market-based conditions granted under the 2016 Plan during 2018 was estimated using the Monte Carlo simulation with the following weighted-average assumptions:

	Year Ended December 31, 2018
Expected term (in years)		6.25
Expected volatility		70.0	%
Risk-free interest rate		2.30	%
Expected dividend rate		—	%

Awards Granted to Non-Employees under the 2016 Plan

Prior to the adoption of ASU No. 2018-07, Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, on January 1, 2018, for awards granted to non-employees (other than non- employee directors of the Company), the Company determined the fair value of the award at each balance sheet date and recorded additional compensation expense, if necessary, each period until the award was exercised or cancelled. Subsequent to the early adoption of ASU No. 2018-07, awards granted to non-employees are accounted for in the same manner as awards for employees and are no longer remeasured every reporting period. The Company recorded stock-based compensation expense of $1.3 million and $0.4 million related to awards granted to non-employees during 2018 and 2019, respectively.

Non-Plan Equity Incentive Awards

During 2016, the Company granted restricted stock awards of 1,125,000 shares of Class A common stock outside of the 2016 Plan. These awards have an expiration term of 10 years. Of these awards, 1,000,000 will vest over a period of 4 years with 1/48th vesting on the monthly anniversary of the grant date with the exception of accelerating events relating to certain successful patent claims. The remaining 125,000 of these awards vest over a period of 4 years with 25% vesting upon the first anniversary of the grant date and 1/48th vesting at the end of each month thereafter. During 2018 and 2019, 281,250 and 281,250, respectively, of these awards vested. As of December 31, 2018 and 2019, 416,667 and 135,417, respectively, of these awards remained unvested. The weighted-average grant date fair value per share for these awards was $0.25 and the aggregate grant date fair value was $0.3 million. The total grant date fair value of awards that vested during 2018 and 2019 was, $0.1 million and $0.1 million, respectively. Stock-based compensation expense of $0.2 million and $0.1 million was recognized during 2018 and 2019, respectively, for these awards.

During 2018, the Company granted 28,683,500 options of Class A common stock outside of the 2016 Plan to two of the Company’s executives, of which 476,191 were exercised.

Of these options, 21,453,125 have an expiration term of 10 years and vest over a period of 4 years with 25% vesting upon the first anniversary of the grant date and 1/48th vesting at the end of each month thereafter. The weighted-average grant date fair value per share was $0.45 and the aggregate grant date fair value was $9.7 million.

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The fair value of these options was estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions:

	Year Ended December 31, 2018
Expected term (in years)		6.07
Expected volatility		67.8	%
Risk-free interest rate		2.43	%
Expected dividend rate		—	%

As of December 31, 2019, 476,191 of these options had been exercised. The aggregate intrinsic value of non-2016 Plan incentive awards exercised during 2018 and 2019 was $0.6 million and $0, respectively. During 2019, 8,279,501 of these options were forfeited. The total grant date fair value of awards that vested during 2018 and 2019 was $0 and $4.0 million, respectively. Stock-based compensation expense of $1.6 million and $1.2 million was recognized during 2018 and 2019, respectively, for these awards.

The remaining 7,230,375 options granted in 2018 vest upon satisfaction of performance- and market-based conditions. The performance-based condition is satisfied upon the Company successfully executing an IPO of the Company’s common stock and achieving certain performance targets. The market-based condition is satisfied upon the Company maintaining certain market capitalization levels after the IPO. For these options, the Company uses a Monte Carlo simulation to determine the fair value at the grant date and the implied service period. The weighted- average grant date fair value per share for these options was $0.38 per share, and the aggregate grant date fair value was $2.8 million. In 2018 and 2019, the Company did not recognize any stock-based compensation expense associated with these options as the achievement of the performance-based condition was not deemed to be probable.

The fair value of the Company’s options with performance- and market-based conditions not granted under the 2016 Plan during 2018 was estimated using the Monte Carlo simulation with the following weighted-average assumptions:

	Year Ended December 31, 2018
Expected term (in years)		6.25
Expected volatility		70.0	%
Risk-free interest rate		2.48	%
Expected dividend rate		—	%

None of the Non-Plan Equity Incentive Awards using the Monte Carlo simulation vested in 2018 or 2019 and none were exercised in 2018 or 2019. During 2019, all of these options were forfeited.

During 2019, the Company granted restricted stock units of 13,827,568 shares of Class A common stock outside of the 2016 Plan. These units vest over a period of 3 years with 67% vesting upon the second anniversary of the vesting start date and the remaining 33% vesting on the third anniversary of the vesting start date. The weighted- average grant date fair value per share for these units was $1.92 per share and the aggregate grant date fair value was $26.5 million. None of these units have vested as of December 31, 2019.

During 2019, the Company modified 10,658,214 options granted outside of the 2016 Plan with service-based conditions and 1,631,375 options granted outside of the 2016 Plan with performance- and market-based conditions. See “Modification of Stock Options”. All remaining options, which were neither modified nor exercised, were forfeited as of December 31, 2019.

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The Non-Plan Incentive Awards outstanding as of December 31, 2019 had a weighted-average exercise price of $0.93 per share.

Early Exercise of Stock Options

Certain options granted under the 2016 Plan and Non-Plan Incentive Awards have been early exercised. The unvested shares are subject to a repurchase right held by the Company at the original purchase price. The proceeds initially are recorded as a liability for early exercise of unvested options and reclassified to additional paid-in capital as the repurchase right lapses. The Company issued 1,855,800 and 164,981 shares of common stock upon the early exercise of options during 2018 and 2019, respectively, for total exercise proceeds of $1.3 million and $0.2 million, respectively. During 2018 and 2019, the Company repurchased 865,149 and 857,476 shares, respectively, of unvested common stock related to early exercised options at the original purchase price due to the termination of employees.

Shares Subject to Repurchase

As of December 31, 2018 and 2019, 12,109,959 and 7,145,211 shares, respectively, held by employees and directors were subject to the Company’s right of repurchase at an aggregate price of $3.7 million and $2.2 million, respectively.

Modification of Stock Options

In the second quarter of 2018, the Company entered into a separation arrangement with a senior executive, as a result of which certain of his service-based stock options to purchase shares of Class A common stock were modified. As a result of this modification, the vesting of 1,200,000 options was accelerated as of the date of the separation agreement. In consideration for consulting services, the remaining unvested service-based awards continue to vest on a monthly basis during the consulting period. As a result of this modification, the fair value of his service-based stock options increased by $4.5 million, which was recorded as an incremental expense during 2018. In addition, the fair values of his performance-based and performance- and market-based conditions were increased by $3.7 million due to the modification. The Company did not account for the increase in fair value as the related performance-based conditions were not deemed to be probable. As of December 31, 2019, the related performance-based conditions continued to not be deemed probable.

In the first quarter of 2019, the Company modified an employee’s options to purchase 1,631,375 shares of Class A common stock with performance- and market-based conditions. As a result of this modification, the performance- based conditions were changed, and the market-based conditions were eliminated. The Company accounted for the changes to the awards as a modification, and the fair value of these awards was increased by $0.3 million with no impacts recorded in the financial statements. As of December 31, 2019, the awards have been cancelled.

In the third quarter of 2019, the Company entered into a consulting agreement with an employee, as a result of which 1,631,375 of his unvested service-based options to purchase shares of Class A common stock continue to vest on a monthly basis during the consulting period and 2,854,906 options had their exercise period extended. The Company accounted for the changes to the awards as a modification, and the fair value of his service-based stock options increased by $3.0 million which was recorded as an incremental expense during 2019.

During 2019, the Company entered into agreements with 10 employees, as a result of which the terms of certain of their service-based options to purchase shares of Class A common stock were modified. As a result of these modifications, the vesting of 4,716,504 options were accelerated as of

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the date of the agreements, and 10,896,983 of the vested options had their exercise period extended. The Company accounted for the changes to the options as modifications, and the fair value of their service-based options was increased by $6.1 million, which was recorded as an incremental expense during 2019.

Stock-Based Compensation Expense

The following table is a summary of stock-based compensation expense recognized during 2018 and 2019 for employees and non-employees for both the 2016 Plan and non-2016 Plan equity incentive awards:

	Year Ended December 31,
	2018		2019
	(in thousands)
Research and development	$	937	$	3,913
Research and development—related parties		778		135
Marketing		123		202
General and administrative		9,203		24,141
Total stock-based compensation expense	$	11,041	$	28,391

As of December 31, 2019, the total unrecognized stock-based compensation expense for awards that contain service-based conditions for both the 2016 Plan and Non-Plan Equity Incentive Awards was $105.4 million, which is expected to be recognized over a weighted-average period of approximately 2.98 years. As of December 31, 2019, the total unrecognized stock-based compensation expense for awards that contain only performance-based or performance- and market-based conditions for both the 2016 Plan and Non-Plan Equity Incentive Awards was $13.8 million.

Liability-Classified Awards with Performance- and Market-Based Vesting Conditions Granted under the 2016 Plan

In February 2016, the Company entered into an agreement with a current executive officer pursuant to which he is eligible to receive $10.0 million in incentive awards.

In October 2017, the Company entered into a transition agreement with the vice chairperson of the board of directors. Under the transition agreement, the individual is eligible to receive up to $130.0 million in incentive awards.

In June 2018, the Company entered into a separation agreement with a former executive. Under the agreement, the individual is eligible to receive up to $8 million in incentive awards. The award is subject to the respective individual’s continued service to the Company which terminates in June 2020, and will be earned, if and when, the board, in its sole discretion, has determined the completion of a transformative deal.

The above incentive awards are granted subject to the respective individual’s continued service to the Company. Generally, the awards are earned upon the satisfaction of certain performance- and market-based conditions, including upon achievement of certain milestones related to the Company’s products or the closing of one or more qualifying events at specified per-share valuations, provided the qualifying events occur within a specified time period, the last of which ends in March 2026. The qualifying events vary depending on individual and generally include (i) certain financing events, including minimum public trading valuations and (ii) a change in control. The determination of whether certain qualifying events have occurred are subject to approval by the board of directors.

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All the above incentive awards will be paid, at the Company’s election, in fully vested shares of common stock or in cash. The dollar value of these incentive awards is based on the achievement of the performance- and market- based conditions described above. The number of shares is variable based on the per-share valuation at the time of the respective qualifying event. Accordingly, these awards are accounted for as liability-classified awards, and, once the related performance-based conditions are deemed to be probable, the liability will be remeasured at fair value on each reporting date until the awards vest.

As of December 31, 2019, the Company had not recognized any compensation expense associated with these awards as the achievement of the performance-based condition was not deemed to be probable.

NOTE 11. INCOME TAXES

The components of the loss before provision for (benefit from) income taxes during 2018 and 2019 are as follows:

	Year Ended December 31,
	2018			2019
	(in thousands)
United States	$	278,198		$	245,430
Foreign		(2,965	)		(380	)
Loss before provision for (benefit from) income taxes	$	275,233		$	245,050

The components of income tax expense (benefit) consist of the following:

	Year Ended December 31,
	2018			2019
	(in thousands)
Current taxes:
Federal	$	—		$	—
State		—			—
Foreign		834			(544	)
Total current income tax expense/(benefit)	$	834		$	(544	)
Deferred taxes:
Federal		—			—
State		—			—
Foreign		(349	)		349
Total deferred income tax expense/(benefit)	$	(349	)	$	349
Provision for (benefit from) income taxes		485			(195	)

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The following is a reconciliation of the statutory federal income tax rate to the Company’s effective tax rate:

	Year Ended December 31,
	2018			2019
Federal statutory rate		21.00	%		21.00	%
State income taxes		6.98			6.98
Change in tax status		29.94			—
Other permanent items		(0.96	)		(0.73	)
Research and development credit		3.03			3.54
Change in valuation allowance		(60.17	)		(30.70	)
Other		—			(0.01	)
Effective tax rate		(0.18	)%		0.08	%

The Company’s effective tax rate differs from the federal statutory rate primarily due to the valuation allowance recorded to offset deferred tax assets resulting from the Company’s U.S. operating losses. During 2018, the Company changed the tax status of one of its foreign subsidiaries, which resulted in a tax benefit.

The significant components of the Company’s net deferred tax assets as of December 31, 2018 and 2019, are as follows:

	Year Ended December 31,
	2018			2019
	(in thousands)
Deferred tax assets:
Net operating loss carryforwards	$	53,701		$	61,259
Research and development credits		20,975			29,292
Amortization		150,648			203,098
Depreciation		8,147			8,057
Accruals and reserves		12,857			15,853
Lease liabilities		—			11,541
Total deferred tax assets		246,328			329,100
Valuation allowance		(245,979	)		(319,224	)
Net deferred tax assets		349			9,876
Deferred tax liabilities
Right-of-use assets		—			(9,804	)
Other		—			(72	)
Net deferred tax assets (liabilities)	$	349		$	—

As of December 31, 2019, the Company had established a valuation allowance of $319.2 million against its gross deferred tax assets due to the uncertainty surrounding the realization of such assets. The valuation allowance increased by $170.5 million and $73.2 million during 2018 and 2019, respectively. As a result of a foreign subsidiary’s change in tax status in 2018, the Company recorded $82.4 million of deferred tax assets. These deferred tax assets represent the U.S. tax basis of the intangible asset acquired in the 2017 acquisition of Cirina Limited. The remaining change in the valuation allowance for both years was primarily due to the addition of current year loss carryforwards and the capitalization of start-up expenditures.

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On December 22, 2017, the Tax Cuts and Jobs Act (P.L. 115-97) (the Act) was signed into law. The Act includes certain anti-deferral and anti-abuse erosion provisions, including a new minimum tax on global intangible low-taxed income (GILTI) and base erosion and anti-abuse tax (BEAT). The Act subjects the Company to current tax on GILTI of its controlled foreign corporations. At December 31, 2019, the Company recognized no GILTI inclusion. The BEAT limits the ability of multinational corporations with gross receipts of more than $500 million (averaged over the prior three years) to shift profits from the United States by making deductible payments to their affiliates in low-tax countries. In 2019, the Company’s gross receipts were less than the reporting threshold.

As of December 31, 2019, the Company had $202.5 million of federal net operating loss (NOL) carryforwards. The federal NOL carryforwards generated prior to December 31, 2016 begin expiring in 2036 if not utilized. Federal NOLs generated after December 31, 2017 have an indefinite carryforward period subject to the 80% deduction limitation based upon pre-NOL deduction taxable income.

At December 31, 2019, the Company had $279.4 million of state net operating loss carryforwards. The state net operating loss carryforwards begin expiring in 2036, if not utilized.

In addition, the Company has federal research and development tax credits carryforwards of $22.2 million and state research and development tax credit carryforwards of $18.2 million. The federal credit carryforwards begin expiring in 2036 and the state credits carry forward indefinitely. The Internal Revenue Code contains provisions which limit the amount of NOL and research credit carryforwards that can be used in any given year if a significant change in ownership has occurred. The Company has not performed a detailed analysis on the changes in the ownership of its shares. It is possible that there might be a limitation to the amount of its NOL carryforwards and/or research and development carryforwards that might be used to offset its future taxable income.

As of December 31, 2019, the Company had $9.1 million in unrecognized tax benefits.

The beginning and ending unrecognized tax benefits amounts were as follows (in thousands):

	Year Ended December 31,
	2018		2019
	(in thousands)
Gross amount of unrecognized tax benefits as of the beginning of the period	$	3,590	$	5,916
Increase related to prior year tax provisions		—		740
Increase related to current year tax provisions		2,326		2,414
Gross amount of unrecognized tax benefits as of the end of the period	$	5,916	$	9,070

It is the Company’s policy to include penalties and interest expense related to income taxes as a component of income tax expense as necessary. Management determined that no accrual for interest and penalties was required as of December 31, 2019.

The Company’s major tax jurisdictions are the United States and California. The Company’s tax years since inception will remain open for examination by the federal and state tax authorities due to historical losses. The Company is not currently subject to income tax examinations by any authority.

NOTE 12. RELATED-PARTY TRANSACTIONS

Illumina Agreements

From January 2016 to February 2017, Jay Flatley was the Company’s chairman of the board of directors. Mr. Flatley was and is also the executive chairman of the board of directors of Illumina, Inc.

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(Illumina). Illumina (i) is a major supplier of the Company’s reagents and capital equipment, (ii) was a sub-lessee of laboratory and office space through February 2017, and (iii) owned more than 50% of the Company until February 2017, at which time the Company repurchased shares to bring Illumina to a minority ownership.

In January 2019, pursuant to the Company’s supply and commercialization with Illumina, which was entered into in January 2016 and subsequently amended in September 2017, the Company paid Illumina $15.0 million related to its data delivery requirements under a supply and commercialization agreement with Illumina. This amount was accrued as of December 31, 2018. In February 2019, pursuant to the terms of the Company’s supply and commercialization agreement with Illumina, the Company entered into two separate non-exclusive and non- sublicensable license agreements with Illumina. Under these license agreements, the Company sublicensed to Illumina rights to patents and technology in-licensed from other collaboration partners. Under these license agreements, Illumina is required to pay the Company (i) initial aggregate licensing fees of $50,000, (ii) annual minimum aggregate royalties of $50,000, increasing by $10,000 annually to a max of $100,000, and (iii) running royalties in the low single-digit percentages of net sales of products utilizing in-licensed technology. In addition, one of the license agreements includes a milestone of $50,000 tied to the first commercial sale of a product covered by a licensed patent. During 2019, Illumina paid the Company $0.2 million associated with licensing fees, minimum royalties, and achievement of the milestone.

Transactions with Illumina under a supply and commercialization agreement as well as for limited services rendered by Illumina on the Company’s behalf that have been reflected in the consolidated financial statements are as follows:

	As of December 31,
	2018		2019
	(in thousands)
Prepaid service arrangements	$	1,342	$	567
Property and equipment, net		3,323		1,252
Accounts payable		51		151
Accrued liabilities		20,439		—

	Year Ended December 31,
	2018		2019
	(in thousands)
Research and development	$	29,442	$	7,520

Dr. Klausner Consulting Agreement

Effective May 2016, the Company entered into a consulting agreement with Richard Klausner, M.D. Dr. Klausner is: (i) a member of the board of directors of the Company; and (ii) has performed advisory consulting services. The compensation under the consulting agreement consists of options to purchase 876,000 shares of Class A common stock at an exercise price of $0.23 per share that were granted in 2016 and reimbursement of certain out of pocket expenses. In May 2018, in connection with Dr. Klausner’s board service, the Company granted him additional options to purchase 450,000 shares of Class A common stock at an exercise price of $1.74 per share.

Collaboration Agreement with Memorial Sloan Kettering Cancer Center

From February 2017 to February 2018, José Baselga, M.D., Ph.D., Physician-in-Chief and Chief Medical Officer at Memorial Sloan Kettering Cancer Center (MSK) was a member of the board of directors of the Company. In February 2017, the Company entered into collaboration and research

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agreements with MSK pursuant to which the Company incurred expenses totaling $3.4 million during 2018. As of December 31, 2018, the Company recorded $0.8 million in accrued liabilities—related parties and $0.3 million in accounts payable—related parties. As of January 1, 2019, MSK was no longer considered a related party.

Collaboration Agreement with Janssen Biotech, Inc.

Johnson & Johnson UK Treasury Company Limited (J&J UK Treasury) and Janssen Biotech, Inc. (Janssen) are subsidiaries of Johnson & Johnson Inc. (J&J). As of December 31, 2018 and December 31, 2019, J&J UK Treasury was a minority stockholder of the Company. In November 2017, the Company entered into a collaboration agreement with Janssen. Research services performed by the Company in 2018 totaled $0.7 million, which were paid by Janssen during 2018. In December 2019, the Company entered into a testing resources and collaboration agreement with Janssen. No research services were performed in 2019.

Agilent Arrangements

Since August 2018, Hans Bishop has served as a member of the Company’s board of directors. In June 2019, Mr. Bishop was appointed as the Company’s chief executive officer. Mr. Bishop is also on the board of directors of Agilent Technologies, Inc. (Agilent). Agilent is a supplier to the Company. Research and development expenses incurred during 2018 were immaterial. During 2019, the Company incurred $0.5 million in research and development expenses in connection with purchase orders with Agilent. As of December 31, 2019, $0.1 million is reflected in accounts payable—related parties. As of December 31, 2018 and 2019, $0.1 million of property and equipment that the Company purchased from Agilent is reflected in the consolidated balance sheets.

NOTE 13. NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS

The following table presents the calculation of basic and diluted net loss per share attributable to Class A and Class B common stockholders:

	Year Ended December 31,
	2018						2019
	Class A			Class B			Class A			Class B
	(in thousands, except share and per share data)
Numerator
Net loss	$	(236,032	)	$	(39,686	)	$	(208,871	)	$	(35,984	)
Net loss attributable to Class A and Class B common stockholders
Basic and diluted	$	(236,032	)	$	(39,686	)	$	(208,871	)	$	(35,984	)
Denominator
Weighted-average shares of Class A and Class B common stock used in computing net loss per share attributable to Class A and Class B common stockholders
Basic and diluted		97,709,944			16,428,968			105,084,506			18,103,845
Net loss per share attributable to Class A and Class B common stockholders
Basic	$	(2.42	)	$	(2.42	)	$	(1.99	)	$	(1.99	)
Diluted	$	(2.42	)	$	(2.42	)	$	(1.99	)	$	(1.99	)

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As the Company was in a net loss position for all periods presented, basic net loss per share is the same as diluted net loss per share because the inclusion of potential shares of common stock would have been anti-dilutive. The following common stock equivalents were therefore excluded from the computation of diluted net loss per share for the periods presented:

	Year Ended December 31,
	2018		2019
Redeemable convertible preferred stock (on an if-converted basis)		457,401,191		488,724,604
Options to purchase common stock and restricted stock units		69,401,567		120,824,676
Shares subject to repurchase		12,109,959		7,145,211
Total		538,912,717		616,694,491

NOTE 14. DEFINED CONTRIBUTION PLAN

The Company sponsors a defined contribution plan under Section 401(k) of the Internal Revenue Code covering eligible employees. Contributions made by the Company are voluntary and are determined annually by the board of directors on an individual basis subject to the maximum allowable amount under federal tax regulations. The Company has made no contributions to the plan since its inception.

NOTE 15. SUBSEQUENT EVENTS

The Company has reviewed and evaluated subsequent events through April 21, 2020, the date the consolidated financial statements were available to be issued.

Subsequent to December 31, 2019, the Company granted options to purchase 18,860,550 shares of Class A common stock at a weighted-average exercise price of $2.09 per share.

In January 2020, the Company issued 4,894,283 additional shares of Series D redeemable convertible preferred stock for gross proceeds of $25 million.

In April 2020, the Company increased its authorized shares of Series D redeemable convertible preferred stock to 83,202,813. The Company issued 36,660,075 additional shares of Series D redeemable convertible preferred stock for gross proceeds of $187 million.

41

EX-99.2

Exhibit 99.2

GRAIL UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2020 AND FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

GRAIL, INC.

	Page
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets		2
Condensed Consolidated Statements of Operations		4
Condensed Consolidated Statements of Comprehensive Loss		5
Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Deficit		6
Condensed Consolidated Statements of Cash Flows		8
Notes to Unaudited Condensed Consolidated Financial Statements		9

1

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

(unaudited)

	As of September 30, 2020		As of December 31, 2019
Assets
Current assets:
Cash and cash equivalents	$	166,815	$	143,189
Short-term marketable securities		465,681		401,155
Prepaid expenses and other current assets		5,819		12,585
Prepaid expenses and other current assets—related parties		753		584
Total current assets		639,068		557,513
Property and equipment, net		24,285		23,078
Property and equipment, net—related parties		358		1,347
Operating lease right-of-use assets		52,698		35,036
Long-term marketable securities		2,064		13,933
Restricted cash		4,577		1,228
Other non-current assets		4,421		3,384
Total assets	$	727,471	$	635,519
Liabilities, redeemable convertible preferred stock, and stockholders’ (deficit) equity
Current liabilities:
Accounts payable	$	6,512	$	5,880
Accounts payable—related parties		1,461		207
Accrued liabilities		44,630		31,584
Liability for early exercise of unvested stock options, current portion		383		1,855
Operating lease liabilities, current portion		5,191		4,604
Other current liabilities		—		800
Other current liabilities—related party		2,520		—
Total current liabilities		60,697		44,930
Operating lease liabilities, net of current portion		53,816		36,638
Liability for early exercise of unvested stock options, net of current portion		354		349
Other non-current liabilities		2,669		3,075
Total liabilities		117,536		84,992
Commitments and contingencies (Note 7)
Redeemable convertible preferred stock:
Series A redeemable convertible preferred stock, $0.001 par value, 85,000,000 shares authorized as of September 30, 2020 and December 31, 2019; 85,000,000 shares issued and outstanding as of September 30, 2020 and December 31, 2019; aggregate liquidation preference of $85,000 as of September 30, 2020 and December 31, 2019	$	68,263	$	68,263

2

	As of September 30, 2020			As of December 31, 2019
Series B redeemable convertible preferred stock, $0.001 par value, 309,256,591 shares authorized as of September 30, 2020 and December 31, 2019, respectively; 309,256,591 shares issued and outstanding as of September 30, 2020 and December 31, 2019; aggregate liquidation preference of $1,239,655 as of September 30, 2020 and December 31, 2019		1,235,404			1,235,404
Series C redeemable convertible preferred stock, $0.001 par value, 63,144,600 shares authorized as of September 30, 2020 and December 31, 2019; 63,144,600 shares issued and outstanding as of September 30, 2020 and December 31, 2019; aggregate liquidation preference of $300,000 as of September 30, 2020 and December 31, 2019		299,557			299,557
Series D redeemable convertible preferred stock, $0.001 par value, 76,743,836 and 48,942,833 shares authorized as of September 30, 2020 and December 31, 2019, respectively; 76,743,836 and 31,323,413 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively; aggregate liquidation preference of $392,008 and $160,000 as of September 30, 2020 and December 31, 2019, respectively		391,697			159,836
Total redeemable convertible preferred stock		1,994,921			1,763,060
Stockholders’ (deficit) equity:
Common stock, $0.001 par value; 898,203,200 (Class A—868,203,200 and Class B—30,000,000) shares and 863,943,220 (Class A—833,943,220 and Class B—30,000,000) shares authorized as of September 30, 2020 and December 31, 2019, respectively; 145,736,091 (Class A—120,746,694 and Class B—24,989,397) shares and 134,663,097 (Class A—109,673,700 and Class B—24,989,397) shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively		156			138
Additional paid-in capital		133,274			90,495
Accumulated other comprehensive income		4,011			2,465
Accumulated deficit		(1,522,427	)		(1,305,631	)
Total stockholders’ deficit		(1,384,986	)		(1,212,533	)
Total liabilities, redeemable convertible preferred stock, and stockholders’ deficit	$	727,471		$	635,519

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

3

GRAIL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

(unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019
Operating expenses:
Research and development	$	44,904		$	35,793		$	127,913		$	119,023
Research and development—related parties		3,133			3,211			7,323			7,704
Marketing		3,707			1,416			8,397			5,496
General and administrative		29,509			24,160			76,813			55,772
Total operating expenses		81,253			64,580			220,446			187,995
Loss from operations		81,253			64,580			220,446			187,995
Interest income, net	$	(950	)	$	(2,910	)	$	(5,078	)	$	(9,905	)
Other expense (income), net	$	69		$	(992	)	$	1,404		$	(278	)
Loss before provision for income taxes	$	80,372		$	60,678		$	216,772		$	177,812
Provision for income taxes		8			2			24			68
Net loss	$	80,380		$	60,680		$	216,796		$	177,880
Net loss attributable to Class A and Class B common stockholders
Basic and diluted	$	80,380		$	60,680		$	216,796		$	177,880
Net loss per share attributable to Class A and Class B common stockholders
Basic and diluted	$	(0.58	)	$	(0.49	)	$	(1.61	)	$	(1.46	)
Weighted-average shares of Class A and Class B common stock used in computing net loss per share attributable to Class A and Class B common stockholders
Basic and diluted		137,922,007			124,760,823			134,477,041			122,100,069

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

4

GRAIL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

(unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019
Net loss	$	80,380		$	60,680		$	216,796		$	177,880
Other comprehensive income:
Net unrealized loss (gain) on marketable securities		410			(34	)		(125	)		(751	)
Foreign currency translation adjustment		(2	)		1,052			(1,421	)		356
Comprehensive loss	$	80,788		$	61,698		$	215,250		$	177,485

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

5

GRAIL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT

(in thousands, except share data)

(unaudited)

	Three Months Ended September 30, 2020
	Redeemable Convertible Preferred Stock																Common Stock									Additional Paid-In Capital		Accumulated Other Comprehensive (Loss) Income			Accumulated Deficit			Total Stockholders’ Deficit
	Preferred Series A				Preferred Series B				Preferred Series C				Preferred Series D				Class A					Class B
	Shares		Amount		Shares		Amount		Shares		Amount		Shares		Amount		Shares			Amount		Shares		Amount
Balance at June 30, 2020		85,000,000	$	68,263		309,256,591	$	1,235,404		63,144,600	$	299,557		76,743,836	$	391,697		110,862,469		$	112		24,989,397	$	34	$	116,960	$	4,419		$	(1,442,047	)	$	(1,320,522	)
Issuance of shares upon exercise of options		—		—		—		—		—		—		—		—		10,071,100			9		—		—		5,925		—			—			5,934
Repurchases of early exercised stock options		—		—		—		—		—		—		—		—		(186,875	)		—		—		—		—		—			—			—
Vesting of early exercised stock options		—		—		—		—		—		—		—		—		—			1		—		—		43		—			—			44
Stock-based compensation expense		—		—		—		—		—		—		—		—		—			—		—		—		10,346		—			—			10,346
Other comprehensive loss		—		—		—		—		—		—		—		—		—			—		—		—		—		(408	)		—			(408	)
Net loss		—		—		—		—		—		—		—		—		—			—		—		—		—		—			(80,380	)		(80,380	)
Balance at September 30, 2020		85,000,000	$	68,263		309,256,591	$	1,235,404		63,144,600	$	299,557		76,743,836	$	391,697		120,746,694		$	122		24,989,397	$	34	$	133,274	$	4,011		$	(1,522,427	)	$	(1,384,986	)

	Three Months Ended September 30, 2019
	Redeemable Convertible Preferred Stock												Common Stock									Additional Paid-In Capital		Accumulated Other Comprehensive (Loss) Income			Accumulated Deficit			Total Stockholders’ Deficit
	Preferred Series A				Preferred Series B				Preferred Series C				Class A					Class B
	Shares		Amount		Shares		Amount		Shares		Amount		Shares			Amount		Shares		Amount
Balance at June 30, 2019		85,000,000	$	68,263		309,256,591	$	1,235,404		63,144,600	$	299,557		108,571,585		$	107		24,989,397	$	28	$	67,655	$	1,541		$	(1,177,976	)	$	(1,108,645	)
Issuance of shares upon exercise of options		—		—		—		—		—		—		390,950			1		—		—		295		—			—			296
Repurchases of early exercised stock options		—		—		—		—		—		—		(109,147	)		—		—		—		—		—			—			—
Vesting of early exercised stock options		—		—		—		—		—		—		—			—		—		—		308		—			—			308
Stock-based compensation expense		—		—		—		—		—		—		—			—		—		—		10,104		—			—			10,104
Other comprehensive loss		—		—		—		—		—		—		—			—		—		—		—		(1,018	)		—			(1,018	)
Net loss		—		—		—		—		—		—		—			—		—		—		—		—			(60,680	)		(60,680	)
Balance at September 30, 2019		85,000,000	$	68,263		309,256,591	$	1,235,404		63,144,600	$	299,557		108,853,388		$	108		24,989,397	$	28	$	78,362	$	523		$	(1,238,656	)	$	(1,159,635	)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

6

GRAIL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT

(in thousands, except share data)

(unaudited)

	Nine Months Ended September 30, 2020
	Redeemable Convertible Preferred Stock																Common Stock									Additional Paid-In Capital		Accumulated Other Comprehensive (Loss) Income		Accumulated Deficit			Total Stockholders’ Deficit
	Preferred Series A				Preferred Series B				Preferred Series C				Preferred Series D				Class A					Class B
	Shares		Amount		Shares		Amount		Shares		Amount		Shares		Amount		Shares			Amount		Shares		Amount
Balance at January 1, 2020		85,000,000	$	68,263		309,256,591	$	1,235,404		63,144,600	$	299,557		31,323,413	$	159,836		109,673,700		$	110		24,989,397	$	28	$	90,495	$	2,465	$	(1,305,631	)	$	(1,212,533	)
Issuance of shares upon exercise of options		—		—		—		—		—		—		—		—		11,316,580			11		—		—		7,234		—		—			7,245
Repurchases of early exercised stock options		—		—		—		—		—		—		—		—		(243,586	)		—		—		—		—		—		—			—
Vesting of early exercised stock options		—		—		—		—		—		—		—		—		—			1		—		6		1,252		—		—			1,259
Issuance of Series D redeemable convertible preferred stock, net of issuance costs of $147		—		—		—		—		—		—		45,420,423		231,861		—			—		—		—		—		—		—			—
Stock-based compensation expense		—		—		—		—		—		—		—		—		—			—		—		—		34,293		—		—			34,293
Other comprehensive gain		—		—		—		—		—		—		—		—		—			—		—		—		—		1,546		—			1,546
Net loss		—		—		—		—		—		—		—		—		—			—		—		—		—		—		(216,796	)		(216,796	)
Balance at September 30, 2020		85,000,000	$	68,263		309,256,591	$	1,235,404		63,144,600	$	299,557		76,743,836	$	391,697		120,746,694		$	122		24,989,397	$	34	$	133,274	$	4,011	$	(1,522,427	)	$	(1,384,986	)

	Nine Months Ended September 30, 2019
	Redeemable Convertible Preferred Stock												Common Stock									Additional Paid-In Capital		Accumulated Other Comprehensive (Loss) Income		Accumulated Deficit			Total Stockholders’ Deficit
	Preferred Series A				Preferred Series B				Preferred Series C				Class A					Class B
	Shares		Amount		Shares		Amount		Shares		Amount		Shares			Amount		Shares		Amount
Balance at January 1, 2019		85,000,000	$	68,263		309,256,591	$	1,235,404		63,144,600	$	299,557		105,372,563		$	102		24,989,397	$	27	$	57,667	$	128	$	(1,060,776	)	$	(1,002,852	)
Issuance of shares upon exercise of options		—		—		—		—		—		—		3,995,069			4		—		—		1,764		—		—			1,768
Repurchases of early exercised stock options		—		—		—		—		—		—		(514,244	)		—		—		—		—		—		—			—
Vesting of early exercised stock options		—		—		—		—		—		—		—			2		—		1		1,148		—		—			1,151
Stock-based compensation expense		—		—		—		—		—		—		—			—		—		—		17,783		—		—			17,783
Other comprehensive gain		—		—		—		—		—		—		—			—		—		—		—		395		—			395
Net Loss		—		—		—		—		—		—		—			—		—		—		—		—		(177,880	)		(177,880	)
Balance at September 30, 2019		85,000,000	$	68,263		309,256,591	$	1,235,404		63,144,600	$	299,557		108,853,388		$	108		24,989,397	$	28	$	78,362	$	523	$	(1,238,656	)	$	(1,159,635	)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

7

GRAIL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Nine Months Ended September 30,
	2020			2019
Cash flows from operating activities
Net loss	$	(216,796	)	$	(177,880	)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization		5,991			7,981
Stock-based compensation expense		34,293			17,783
Loss on disposal of property and equipment		—			342
Loss (gain) on foreign currency		1,390			(354	)
Impairment of property and equipment and other long-term assets		120			2,219
Amortization of discount on marketable securities		(34	)		(3,987	)
Changes in operating assets and liabilities:
Prepaid expenses and other assets		6,322			(1,316	)
Prepaid expenses and other assets—related parties		(169	)		562
Accounts payable		749			(7,099	)
Accounts payable—related parties		1,254			(352	)
Accrued and other liabilities		7,776			(5,892	)
Accrued liabilities—related parties		—			(21,209	)
Other current liabilities—related party		2,520			—
Operating lease right-of-use assets		3,412			3,024
Operating lease liabilities		(3,309	)		(4,247	)
Net cash used by operating activities		(156,481	)		(190,425	)
Cash flows from investing activities
Purchases of property and equipment		(2,197	)		(2,739	)
Purchases of marketable securities		(428,139	)		(397,772	)
Proceeds from maturities of marketable securities		375,641			618,356
Proceeds from sale of property and equipment		—			82
Net cash (used by) provided by investing activities		(54,695	)		217,927
Cash flows from financing activities
Proceeds from exercise of stock options		7,245			1,768
Proceeds from early exercise of unvested stock options		442			186
Repurchases of early exercised stock options		(23	)		(148	)
Proceeds from issuance of Series D redeemable convertible preferred stock, net		231,861			—
Repayments of borrowings from finance lease		(812	)		(1,141	)
Payment of deferred offering costs		(593	)		(779	)
Net cash provided by (used by) financing activities		238,120			(114	)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash		31			(2	)
Net increase in cash, cash equivalents, and restricted cash		26,975			27,386
Cash, cash equivalents and restricted cash—beginning of period		144,417			96,724
Cash, cash equivalents and restricted cash—end of period	$	171,392		$	124,110
Represented by:
Cash and cash equivalents	$	166,815		$	122,882
Restricted cash		4,577			1,228
Total	$	171,392		$	124,110
Supplemental cash flow information:
Cash paid for interest	$	12		$	72
Supplemental disclosure of non-cash activities:
Property and equipment included in accounts payable and accrued liabilities		4,271			240
Right-of-use assets obtained in exchange for new operating lease liabilities		21,074			—
Vesting of early exercised stock options		1,259			1,189
Deferred offering costs included in accrued liabilities		1,420			997

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

8

GRAIL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. ORGANIZATION AND DESCRIPTION OF BUSINESS

GRAIL, Inc. (“GRAIL” or the “Company”) was incorporated in the State of Delaware in September 2015 and began operations as a stand-alone entity in February 2016. GRAIL is a healthcare company focused on developing technologies for early cancer detection. The Company is headquartered in Menlo Park, California.

Since inception, the Company has incurred losses from operations. The Company incurred losses from operations of $81.3 million and $64.6 million for the three months ended September 30, 2020 and 2019, respectively, and $220.4 million and $188.0 million for the nine months ended September 30, 2020 and 2019, respectively. The Company had an accumulated deficit of $1.5 billion as of September 30, 2020. The Company has not yet launched a commercial product and may never develop a product that will generate revenues, including in amounts that will be sufficient to fund operations. Accordingly, the Company has been dependent on its ability to raise capital through equity issuances.

The Company had $634.6 million of cash, cash equivalents, and marketable securities at September 30, 2020. Based on the Company’s business plans, management believes that this is sufficient to meet its obligations for at least 12 months from the issuance date of these unaudited condensed consolidated financial statements.

Illumina Transaction

On September 20, 2020, the Company entered into an Agreement and Plan of Merger with Illumina, Inc. (“Illumina”), SDG Ops, Inc., a wholly-owned subsidiary of Illumina, and SDG Ops, LLC, a Delaware limited liability company and a wholly-owned subsidiary of Illumina (the “Merger Agreement”) pursuant to which Illumina will acquire the Company for $8 billion upon closing of the transaction, consisting of $3.5 billion in cash and $4.5 billion in shares of Illumina common stock, subject to a collar. In addition, stockholders of the Company will receive contingent value rights (“CVR”) to receive future payments representing a pro rata portion of certain revenues related to the Company over a twelve-year period. This will reflect a 2.5% payment right to the first $1 billion of revenue and a 9% payment right to revenues exceeding $1 billion during the same period each year for 12 years. Illumina will offer Company stockholders the option to receive additional cash and/or stock consideration, in an amount to be determined prior to closing, in lieu of the CVR. If the transaction is not consummated on or prior to December 20, 2020, the Merger Agreement provides that Illumina will make cash payments to the Company in the amount of $35 million each month prior to the closing date of the transaction, commencing on December 21, 2020 until the earlier of (1) the closing date of the transaction or (2) the termination of the transaction (“Continuation Payments”).

Completion of the transaction is subject to terms and conditions set forth in the Merger Agreement, including (i) the receipt of required approvals from Company’s stockholders, (2) the receipt of required regulatory approvals, including the expiration or termination of the waiting period (and any extension thereof) under the Hart-Scott-Rodino Act, as amended (the “HSR Act”), (3) the absence of any law, whether temporary, preliminary or permanent, which is then in effect and has the effect of enjoining, restraining, prohibiting or otherwise preventing consummation of the transactions, (4) the effectiveness of the Registration Statement to be filed by Illumina (together with all amendments thereto, the “Registration Statement”), pursuant to which the shares of Illumina common stock to be issued in connection with the transactions will be registered with the Securities and Exchange Commission, and

9

(5) the authorization for listing on NASDAQ of the shares of Illumina common stock to be issued in connection with the transactions. The United States Federal Trade Commission (“FTC”) has been notified about the Merger and it is under review by the FTC.

No assurance can be given that the required regulatory approvals will be obtained or that the required conditions to closing will be satisfied, and, even if all such approvals are obtained and the conditions are satisfied, no assurance can be given as to the terms, conditions and timing of the approvals. The Merger Agreement contains certain termination rights for each of the Company and Illumina, including a termination right for each of the Company and Illumina if the consummation of the merger does not occur on or before September 20, 2021, subject to a three-month extension for certain limited purposes in connection with obtaining certain required regulatory clearances. Upon termination of the Merger Agreement under specified circumstances, Illumina would be required to pay the Company a termination fee of $300 million and make an additional $300 million investment in the Company in exchange for shares of non-voting Company preferred stock, subject to certain terms and conditions. In the event that the Merger Agreement is terminated, with respect to all Continuation Payments in excess of $315 million, Illumina will make an investment in the Company in exchange of shares of non-voting Company preferred stock, subject to certain terms and conditions.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation

The condensed consolidated financial statements as of September 30, 2020 and December 31, 2019 and for the three and nine months ended September 30, 2020 and 2019 include the accounts of GRAIL, Inc. and its wholly-owned subsidiaries. The condensed consolidated financial statements are prepared in accordance with United States Generally Accepted Accounting Principles (U.S. GAAP). All intercompany balances and transactions have been eliminated on consolidation.

Unaudited Condensed Consolidated Financial Statements

The condensed consolidated balance sheet as of September 30, 2020 and the condensed consolidated statements of operations, of comprehensive loss, of cash flows, and of redeemable convertible preferred stock and stockholders’ deficit for the three and nine months ended September 30, 2020 and 2019 are unaudited. The unaudited condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and reflect, in the opinion of management, all adjustments of a normal and recurring nature that are necessary for the fair statement of the Company’s financial position as of September 30, 2020 and its results of operations and cash flows for the three and nine months ended September 30, 2020 and 2019. The financial data and the other financial information disclosed in these notes to the condensed consolidated financial statements related to the three and nine months ended September 30, 2020 and 2019 are also unaudited. The condensed consolidated results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of the results to be expected for the year ending December 31, 2020 or for any other future annual or interim period. The condensed consolidated balance sheet as of December 31, 2019 included herein was derived from the audited consolidated financial statements as of that date, but does not include all disclosures required by U.S. GAAP. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the related notes thereto as of and for the year ended December 31, 2019.

Use of Estimates

The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts of assets and

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liabilities, disclosure of contingent assets and liabilities, and the reported amounts of expenses in the condensed consolidated financial statements and accompanying notes. On an ongoing basis, management evaluates its estimates, including those related to accrued clinical studies and research and development expenses, stock-based compensation expense, useful lives of intangible assets and property and equipment, determination of incremental borrowing rate for operating leases, and the provision for income taxes.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash, cash equivalents, and marketable securities.

Substantially all the Company’s cash and cash equivalents are deposited in accounts with four accredited financial institutions that management believes are of high-credit quality. Such deposits have and will continue to exceed federally insured limits. The Company has not experienced any losses on its cash deposits.

The Company’s investment policy limits investments to certain types of securities issued by the U.S. government and its agencies and institutions with investment-grade credit ratings and places restrictions on maturities and concentration by type and issuer. The Company is exposed to credit risk in the event of a default by the financial institutions holding its cash, cash equivalents, and marketable securities, and by issuers of marketable securities to the extent recorded on the consolidated balance sheets. As of September 30, 2020, the Company had no off-balance sheet concentrations of credit risk.

Risks and Uncertainties

The Company is in the research and discovery stage and may never develop a product that will generate revenues, including in amounts that will be sufficient to fund operations. The market for which the Company is developing products is highly competitive and rapidly changing. Difficulties or delays in the Company’s clinical studies, delays in planned commercial launch of the Company’s products, potential complications with the Company’s sole suppliers, complex regulatory regimes, regulatory issues and other factors could negatively impact the Company’s operating results.

The Company may need to raise additional equity or debt financing to fund future operations that may not be available at terms acceptable to the Company, if at all. If the Company does not successfully commercialize its products in development, it will be unable to generate revenue from product sales or achieve profitability.

In December 2019, a novel strain of coronavirus (COVID-19) was reported in Wuhan, China and has since become a global pandemic. The COVID-19 pandemic poses the risk that the Company, its personnel and other partners may be prevented from conducting business activities for an indefinite period of time, including due to spread of the disease within these groups or due to shutdowns that may be requested or mandated by governmental authorities. The ongoing COVID-19 pandemic has delayed anticipated completion of the Company’s clinical studies, as the Company had to suspend enrollment of the studies during the nine months ended September 30, 2020. As of the date of issuance of these unaudited condensed consolidated financial statements, the Company is not aware of any specific event or circumstance related to COVID-19 that would require it to update its estimates or judgments or adjust the carrying value of its assets or liabilities. Actual results could differ from those estimates and any such differences may be material to the consolidated financial statements. The extent to which the coronavirus outbreak may materially impact the Company’s financial condition, liquidity, or results of operations is uncertain.

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The Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) was enacted by the United States on March 27, 2020. The Company is continuing to analyze the impact of the CARES Act. The CARES Act did not have a material impact on the Company’s provision for income taxes for the three and nine months ended September 30, 2020.

Significant Accounting Policies

There have been no material changes in the Company’s accounting policies from those disclosed in the audited consolidated financial statements and related notes thereto as of and for the year ended December 31, 2019.

Recent Accounting Pronouncements

Accounting Standards Update (ASU) 2016-13 and 2020-03, collectively implemented as Financial Accounting Standards Board (FASB) Accounting Standards Codification 326, Financial Instruments—Credit Losses (Topic 326), provides amended guidance for measuring current expected credit loss. In June 2016, FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326). ASU 2016-13 requires measurement and recognition of expected credit losses for financial assets. On January 1, 2020, the Company adopted Topic 326 using a modified retrospective approach, which had no material impact on the Company’s condensed consolidated financial statements. In March 2020, the FASB issued ASU 2020-03, Codification Improvements to Financial Instruments, which makes improvements to financial instruments guidance. The adoption of this ASU did not have a material impact on the Company’s condensed consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. The ASU improves the effectiveness of fair value measurements disclosures and modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, based on the concepts in the FASB Concepts Statement, Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial Statements, including the consideration of costs and benefits. On January 1, 2020, the Company adopted Topic 820. The adoption of this ASU did not have a material impact on the Company’s condensed consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40), Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU 2018-15 amended guidance to align the accounting for costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing costs associated with developing or obtaining internal-use software. Capitalized implementation costs must be expensed over the term of the hosting arrangement and presented in the same line item in the statement of income as the fees associated with the hosting element (service) of the arrangement. The Company adopted ASU 2018-15 as of January 1, 2020 on a prospective basis, and the adoption of this ASU did not have a material impact on the Company’s condensed consolidated financial statements.

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NOTE 3. BALANCE SHEET COMPONENTS

Property and Equipment, Net

Property and equipment, net consisted of the following:

	Useful Life (In Years)		As of September 30, 2020			As of December 31, 2019
			(in thousands)
Laboratory equipment		3 to 5		23,566		$	23,157
Computer hardware		3 to 5		5,711			4,994
Computer software		3 to 5		423			257
Furniture and fixtures		5		2,246			2,021
Leasehold improvements		Lease term		22,049			21,931
Construction-in-process				4,787			215
Property and equipment, gross				58,782			52,575
Less accumulated depreciation and amortization				(34,139	)		(28,150	)
Total property and equipment, net			$	24,643		$	24,425

Included within property and equipment, net is $0.4 million and $1.3 million of laboratory equipment purchased from related parties as of September 30, 2020 and December 31, 2019, respectively.

During the three and nine months ended September 30, 2020, the Company recorded impairment charges of nil and $0.1 million relating to laboratory equipment, respectively, in research and development expenses. During the three and nine months ended September 30, 2019, primarily in connection with the decision to exit the Hong Kong facility, the Company recorded impairment charges of $0.1 million and $0.9 million relating to laboratory equipment, computer hardware and furniture and fixtures, respectively, in research and development expenses.

The Company recorded $1.7 million and $2.6 million of depreciation expense during the three months ended September 30, 2020 and 2019, respectively, and $6.0 million and $8.0 million, during the nine months ended September 30, 2020 and 2019, respectively. For more information on the finance leases, see Note 6, Leases.

Accrued Liabilities

Accrued liabilities consist primarily of amounts owed to vendors, employees, and professional service firms.

Accrued liabilities consisted of the following:

	As of
	September 30, 2020		December 31, 2019
	(in thousands)
Accrued compensation expenses	$	18,959	$	14,889
Accrued legal and professional expenses		10,050		4,306
Accrued clinical studies expenses		4,807		5,119
Accrued research and development expenses		3,160		3,494
Accrued construction-in-process		4,260		23
Accrued other expenses		3,394		3,753
Total accrued liabilities	$	44,630	$	31,584

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NOTE 4. FAIR VALUE MEASUREMENTS

The following tables represent the fair value hierarchy for the Company’s financial assets measured at fair value on a recurring basis as of September 30, 2020 and December 31, 2019:

	As of September 30, 2020
	Level 1		Level 2		Level 3		Total
	(in thousands)
Cash equivalents:
Money market funds	$	96,771	$	—	$	—	$	96,771
Corporate debt securities		—		5,507		—		5,507
Commercial paper		—		14,497		—		14,497
Short-term marketable securities:
U.S. government treasuries		173,528		—		—		173,528
U.S. government agency securities		—		30,055		—		30,055
Corporate debt securities		—		126,255		—		126,255
Commercial paper		—		135,843		—		135,843
Long-term marketable securities:
U.S. government agency securities		—		2,064		—		2,064
Total marketable securities		173,528		294,217		—		467,745
Total	$	270,299	$	314,221	$	—	$	584,520

	As of December 31, 2019
	Level 1		Level 2		Level 3		Total
	(in thousands)
Cash equivalents:
Money market funds	$	58,291	$	—	$	—	$	58,291
Corporate debt securities		—		21,001		—		21,001
Commercial paper		—		4,988		—		4,988
Short-term marketable securities:
U.S. government treasuries		37,533		—		—		37,533
U.S. government agency securities		—		7,504		—		7,504
Corporate debt securities		—		236,234		—		236,234
Commercial paper		—		119,884		—		119,884
Long-term marketable securities:
Corporate debt securities		—		5,435		—		5,435
U.S. government agency securities		—		8,498		—		8,498
Total marketable securities		37,533		377,555		—		415,088
Total	$	95,824	$	403,544	$	—	$	499,368

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NOTE 5. MARKETABLE SECURITIES

All marketable securities as of September 30, 2020 and December 31, 2019 are considered available-for-sale, and the amortized costs, unrealized holding gains or losses, and the fair values of the Company’s marketable securities by major security type are summarized in the tables below:

	As of September 30, 2020
	Amortized Cost		Unrealized Holding Gains		Unrealized Holding Losses			Aggregate Fair Value
	(in thousands)
Cash equivalents:
Money market funds	$	96,771	$	—	$	—		$	96,771
Corporate debt securities		5,509		—		(2	)	$	5,507
Commercial paper		14,497		—		—		$	14,497
Total cash equivalents		116,777		—		(2	)		116,775
Short-term marketable securities:
U.S. government treasuries		173,431		97		—		$	173,528
U.S. government agency securities		30,046		9		—			30,055
Corporate debt securities		125,975		285		(5	)		126,255
Commercial paper		135,843		—		—			135,843
Total short-term marketable securities		465,295		391		(5	)		465,681
Long-term marketable securities:
U.S. government agency securities		2,064		—		—			2,064
Total long-term marketable securities		2,064		—		—			2,064
Total marketable securities	$	584,136	$	391	$	(7	)	$	584,520

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	As of December 31, 2019
	Amortized Cost		Unrealized Holding Gains		Unrealized Holding Losses			Aggregate Fair Value
	(in thousands)
Cash equivalents:
Money market funds	$	58,291	$	—	$	—		$	58,291
Corporate debt securities		21,001		—		—			21,001
Commercial paper		4,988		—		—			4,988
Total cash equivalents	$	84,280	$	—	$	—		$	84,280
Short-term marketable securities:
U.S. government treasuries		37,497		37		(1	)		37,533
U.S. government agency securities		7,499		5		—			7,504
Corporate debt securities		236,012		259		(37	)		236,234
Commercial paper		119,884		—		—			119,884
Total short-term marketable securities	$	400,892	$	301	$	(38	)	$	401,155
Long-term marketable securities:
Corporate debt securities		5,439		—		(4	)		5,435
U.S. government agency securities		8,500		—		(2	)		8,498
Total long-term marketable securities	$	13,939	$	—	$	(6	)		13,933
Total marketable securities	$	499,111	$	301	$	(44	)	$	499,368

Interest income related to the Company’s cash equivalents and available-for-sale investments included in interest income, net, was $1.0 million and $2.7 million for the three months ended September 30, 2020 and 2019, respectively, and $4.9 million and $9.3 million for the nine months ended September 30, 2020 and 2019, respectively.

The following table summarizes the maturities of the Company’s available for sale securities, excluding cash equivalents, by contractual maturity, as of September 30, 2020.

	As of September 30, 2020
	Amortized Cost		Aggregate Fair Value
(in thousands)	(in thousands)
Mature in less than one year	$	465,295	$	465,681
Mature in one to two years		2,064		2,064
Total	$	467,359	$	467,745

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The following table summarizes the Company’s available-for-sale securities that were in a continuous unrealized loss position for less than 12 months as of September 30, 2020 and December 31, 2019.

	As of
	September 30, 2020					December 31, 2019
	Aggregate Fair Value		Aggregate Unrealized Losses			Aggregate Fair Value		Aggregate Unrealized Losses
(in thousands)	(in thousands)
U.S. government treasuries	$	—	$	—		$	7,542	$	(1	)
U.S. government agency securities		—		—			8,498		(2	)
Corporate debt securities		9,274		(5	)		62,395		(41	)
Total	$	9,274	$	(5	)	$	78,435	$	(44	)

As of September 30, 2020 and December 31, 2019, some of the Company’s marketable securities were in an unrealized loss position. The Company held a total of 12 and 23 positions, which were in an unrealized loss position as of September 30, 2020 and December 31, 2019, respectively. The Company determined that no credit losses exist as of September 30, 2020 and December 31, 2019 because the change in market value for those securities related primarily to interest rate shifts rather than significant changes in the underlying credit quality of the securities that it holds. The Company has the ability to hold all marketable securities that have been in a continuous loss position until maturity or recovery.

The Company’s short-term marketable securities have an effective maturity date of less than 12 months, and the long-term marketable securities have an effective maturity date of greater than 12 months and less than 16 months.

NOTE 6. LEASES

The Company has entered into operating and finance leases for facilities and research and development equipment. As of September 30, 2020, the Company does not have any remaining finance leases. Operating leases have remaining lease terms which range from 2 years to 13 years, and often include one or more options to renew. These renewal terms can extend the lease term from 1 to 5 years and are included in the lease term when it is reasonably certain that the Company will exercise the option. One lease provides the option to terminate the lease under certain conditions with three months’ notice. The Company does not expect to exercise this termination option. The exercise of lease renewal and termination options is at the Company’s sole discretion. The Company also has variable lease payments that are primarily comprised of common area maintenance and utility charges.

During the nine months ended September 30, 2019, in connection with the decision to exit its Hong Kong facility, the Company recorded impairment charges of $1.3 million in research and development expenses relating to operating lease right-of-use assets (ROU assets). No impairment charges were recorded for the three months ended September 30, 2019.

In June 2020, the Company entered into a new agreement to lease approximately 200,000 square feet of laboratory and office space in North Carolina, which commenced in September 2020 for a term of 12.5 years with three five-year renewal options. Upon commencement, the Company recognized an operating lease ROU asset of $20.2 million and an operating lease liability of $20.2 million. The total estimated aggregate base rent payments, excluding the renewal options and any tenant improvement allowances, for the North Carolina laboratory and office space are $86.6 million.

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Supplemental cash flow information related to leases was as follows:

	September 30, 2020		September 30, 2019
	(in thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	5,462	$	6,013
Financing cash flows from finance leases		812		1,141
Right-of-use assets obtained in exchange for new operating lease liabilities		21,074		—

The components of lease expense were as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
	(in thousands)
Operating lease cost	$	2,136	$	1,753	$	5,653	$	5,466
Finance lease cost
Amortization of leased assets		—		—		—		32
Interest on lease liabilities		—		41		12		97
Short-term lease cost		21		—		223		—
Variable lease cost		794		846		2,207		2,649
Total lease cost	$	2,951	$	2,640		8,095	$	8,244

	As of
	September 30, 2020			December 31, 2019
	(in thousands)
Weighted-average remaining lease term (years):
Operating lease		8.7			6.9
Finance lease		—			0.5
Weighted-average discount rate:
Operating leases		7.0	%		7.0	%
Finance leases		—			5.1	%

As of September 30, 2020, the maturities of the Company’s operating lease liabilities were as follows:

As of September 30, 2020	Amount (in thousands)
2020	$	1,196
2021		10,265
2022		12,208
2023		12,324
2024		14,486
Thereafter		83,629
Total undiscounted lease payments		134,108
Less: Imputed interest		(39,779	)
Less: Tenant improvement allowance*		(35,322	)
Total operating lease liabilities	$	59,007

(*) Tenant improvement allowance is estimated to be received as follows: approximately $8.5 million in 2020, $15.0 million in 2021, $3.9 million in 2023 and $7.9 million in 2024, respectively.

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As of September 30, 2020, the Company does not have additional operating and finance leases that have not yet commenced.

NOTE 7. COMMITMENTS AND CONTINGENCIES

See Note 6 for a summary of the Company’s lease commitments. As of September 30, 2020, the Company’s future commitments over the next five years and thereafter were as follows:

	Minimum Royalties		Purchase Commitments		Total
			(in thousands)
2020*	$	—	$	3,021	$	3,021
2021		570		—		570
2022		575		—		575
2023		1,075		—		1,075
2024		1,075		—		1,075
Thereafter		6,750		—		6,750
Total commitments	$	10,045	$	3,021	$	13,066

(*) Excluding the nine months ending September 30, 2020.

Minimum Royalty Commitments

The Company has certain minimum royalty commitments under licensing agreements related to its research efforts.

Purchase Commitments

The Company has open purchase orders primarily related to the purchase of laboratory supplies in the normal course of business.

Contingencies

The Company responds to claims arising in the ordinary course of business. If necessary, the Company will accrue estimates of the amounts it expects to pay upon resolution of such matters, and such amounts will be included in other current liabilities. Should the Company not be able to secure the terms it expects, these estimates may change and will be recognized in the period in which they are identified.

Legal Matters

The Company is subject to various claims, complaints, and legal actions that arise from time to time. The Company does not believe it is a party to any currently pending or threatened legal proceedings that will result in a material adverse effect on its business. There can be no assurance that existing or future legal proceedings arising in the ordinary course of business or otherwise will not have a material adverse effect on the Company’s business, financial position, results of operations, or cash flows.

Indemnification

The Company has agreed to indemnify its directors and officers for certain events or occurrences while the director or officer is, or was serving, at the Company’s request in such capacity. The

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indemnification period covers all pertinent events and occurrences during the director’s or officer’s service. The maximum potential amount of future payments the Company could be required to make under the applicable indemnification agreements is not specified in the agreements; however, the Company has director and officer insurance coverage that reduces its exposure and enables the Company to recover a portion of any future amounts paid. The Company believes the estimated fair value of these indemnification agreements in excess of applicable insurance coverage is minimal.

The Company enters into standard indemnification arrangements in the ordinary course of business. Pursuant to these arrangements, the Company indemnifies, holds harmless, and agrees to reimburse the indemnified parties for losses suffered or incurred by the indemnified party, in connection with any trade secret, copyright, patent or other intellectual property infringement claim by any third party with respect to the Company’s technology. The term of these indemnification agreements is generally perpetual after the execution of the agreement. The maximum potential amount of future payments the Company could be required to make under these arrangements is not determinable. The Company has not incurred costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes the estimated fair value of these agreements is minimal.

NOTE 8. COMMON STOCK

The Company has two classes of common stock: Class A and Class B. The voting rights per share of Class A and Class B are 1:1 and 10:1, respectively. Common stockholders are entitled to dividends when and if declared by the board of directors subject to the prior rights of the preferred stockholders. As of September 30, 2020, no dividends have been declared. The shares of Class B common stock are convertible into shares of Class A common stock at a ratio of 0.44 shares of Class A common stock to 0.42 shares of Class B common stock.

As of September 30, 2020 and December 31, 2019, the Company has reserved shares of Class A common stock for issuance upon conversion of the redeemable convertible preferred stock, exercise of options and vesting of restricted stock units. No shares of Class B common stock have been reserved. The Company has reserved shares of Class A common stock, on an as converted basis, for issuance as follows:

	As of September 30, 2020		As of December 31, 2019
	(in thousands)
Conversion of Series A redeemable convertible preferred stock		85,000		85,000
Conversion of Series B redeemable convertible preferred stock		309,257		309,257
Conversion of Series C redeemable convertible preferred stock		63,145		63,145
Conversion of Series D redeemable convertible preferred stock		76,744		31,323
Conversion of Class B common stock		26,179		26,179
Options and awards outstanding for the 2016 Equity Incentive Plan		100,076		94,300
Non-Plan Incentive Awards		26,525		26,525
Reserved for future grants		6,868		23,717
Total		693,794		659,446

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NOTE 9. REDEEMABLE CONVERTIBLE PREFERRED STOCK

The following tables represent the redeemable convertible preferred stock as of September 30, 2020 and December 31, 2019:

	As of September 30, 2020
	Shares Authorized		Original Issuance Price		Shares Issued and Outstanding		Net Proceeds		Liquidation Value
	(in thousands, except share and per share data)
Series A		85,000,000		1.0000		85,000,000	$	120,000	$	85,000
Series B		309,256,591		4.0085		309,256,591		1,085,404		1,239,655
Series C		63,144,600		4.7510		63,144,600		299,557		300,000
Series D		76,743,836		5.1080		76,743,836		391,697		392,008
Total		534,145,027				534,145,027	$	1,896,658	$	2,016,663

	As of December 31, 2019
	Shares Authorized		Original Issuance Price		Shares Issued and Outstanding		Net Proceeds		Liquidation Value
	(in thousands, except share and per share data)
Series A		85,000,000		1.0000		85,000,000	$	120,000	$	85,000
Series B		309,256,591		4.0085		309,256,591		1,085,404		1,239,655
Series C		63,144,600		4.7510		63,144,600		299,557		300,000
Series D		48,942,833		5.1080		31,323,413		159,836		160,000
Total		506,344,024				488,724,604	$	1,664,797	$	1,784,655

During the fourth quarter of 2019, the Company issued 31,323,413 shares of Series D redeemable convertible preferred stock for gross proceeds of $160.0 million, less $0.2 million of issuance costs. The Series D redeemable convertible preferred stock has substantially similar terms as the Company’s Series A, B, and C redeemable convertible preferred stock except that it has a liquidation preference of $5.108 per share.

During the nine months ended September 30, 2020, the Company issued 45,420,423 additional shares of Series D redeemable convertible preferred stock for gross proceeds of $232 million less $0.1 million of issuance costs. No additional shares of Series D redeemable convertible preferred stock were issued during the three months ended September 30, 2020. The Series D redeemable convertible preferred stock has substantially similar terms as the Company’s Series A, Series B and Series C redeemable convertible preferred stock except that it has a liquidation preference of $5.108 per share, respectively.

Redemption

As of September 30, 2020 and December 31, 2019, the Company classified the convertible preferred stock as redeemable on the consolidated balance sheets. Upon the occurrence of certain change-in-control events that may be outside the Company’s control, including liquidation, sale, or transfer of the Company, holders of the convertible preferred stock could cause a redemption of their stock for cash. The preferred stock does not have a mandatory redemption date.

Conversion

Each share of preferred stock is convertible, at the option of the holder, according to a conversion ratio, which is subject to adjustment for dilutive share issuances as described in the next paragraph.

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The total number of shares of common stock into which the preferred stock may be converted is determined by dividing the then-applicable conversion price by the initial conversion price. The preferred stock automatically converts into shares of Class A common stock at the then-applicable conversion price in the event of an underwritten public offering of shares of common stock with aggregate gross proceeds of no less than $150 million (Qualifying IPO), provided that, prior to April 17, 2022 (24 months after the Series D extension closing), such automatic conversion shall also require either (i) the per share price of the Qualifying IPO to be at least $5.108 per share (i.e., the Series D preferred stock original issue price) or (ii) the vote of the holders of a majority of the combined Series C and D preferred stock. The preferred stock also automatically converts into shares of Class A common stock at the then-applicable conversion price upon the vote of a majority of the holders of preferred stock and, if prior to April 17, 2022, the vote of the holders of two-thirds of the combined Series C and D preferred stock shall also be required. As of September 30, 2020, each share of Series A, B, C, and D preferred stock was convertible into one share of Class A common stock.

Subject to certain exceptions, including issuances of shares to employees or consultants pursuant to a stock option plan approved by the board of directors and issuances of shares to lenders or strategic partners or in connection with the acquisition of a company or technology, in each case approved by the board of directors, the conversion price of each applicable series of preferred stock is subject to adjustment to prevent dilution in the event that the Company issues additional shares at a purchase price less than the then-applicable conversion price.

Dividends

Any dividends paid in any fiscal year will be paid among the holders of redeemable convertible preferred stock and common stock then outstanding based on preferences and on an if-converted basis. Dividends are noncumulative, and none were declared as of September 30, 2020 or December 31, 2019.

Voting

Each share of redeemable convertible preferred stock is entitled to the number of votes equal to the number of shares of Class A common stock into which such shares could be converted. Holders of redeemable convertible preferred stock and common stock vote as a single class.

Liquidation Preference

In the event of any liquidation, dissolution or winding up of the Company, either voluntary or involuntary, including a merger, acquisition, or sale of assets where the holders of common stock and preferred stock own less than a majority of the resulting voting power of the surviving entity (Liquidation Transaction), the holders of preferred stock will receive in preference to the holders of common stock, an amount per share equal to the liquidation preference, plus any accrued but unpaid dividends. After payment of the liquidation preference to the holders of the preferred stock, the remaining assets of the Company are available for distribution to the holders of common stock on a pro rata basis. The vote of a majority of the holders the preferred stock can waive the liquidation preference; provided that, prior to April 17, 2022, the vote of the holders of two-thirds of the combined Series C and D preferred stock shall also be required to waive such liquidation preference. These liquidation features cause the Series A, B, C, and D preferred stock to be classified as mezzanine equity rather than as a component of stockholders’ deficit.

NOTE 10. STOCK INCENTIVE AWARDS

The Company grants awards under the 2016 Equity Incentive Plan (2016 Plan) as well as incentive awards not under the 2016 Plan (Non-Plan Equity Incentive Awards).

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2016 Equity Incentive Plan

The Company’s board of directors adopted, and its stockholders approved, the Company’s 2016 Plan in January 2016. The 2016 Plan was amended on February 6, 2017, February 27, 2017, September 18, 2019, November 21, 2019, November 25, 2019, and May 7, 2020.

As of September 30, 2020, the Company had granted options or rights to purchase 168,338,895 shares of its Class A common stock and 24,989,397 shares of its Class B common stock under the Company’s 2016 Plan, of which options or rights to purchase 100,075,726 shares of Class A common stock and no shares of Class B common stock were outstanding. As of September 30, 2020, 6,868,074 shares of Class A common stock and no shares of Class B common stock remained available for future grants. The maximum contractual term of options is generally ten years.

The Company’s 2016 Plan allows for the grant of awards in the form of: (i) incentive stock options, (ii) non-qualified stock options; (iii) stock appreciation rights; (iv) restricted stock; (v) restricted stock units; and (vi) unrestricted stock. Directors, employees, and consultants are eligible to participate in the 2016 Plan.

Stock Option Activity—A summary of all stock option activity for the 2016 Plan for the nine months ended September 30, 2020 was as follows:

				Class A
	Number of Shares Available for Grant			Number of Shares Underlying Outstanding Options			Weighted- Average Exercise Price Per Share		Weighted- Average Grant Date Fair Value Per Share		Weighted- Average Remaining Contractual Term (in Years)		Aggregate Intrinsic Value
				(in thousands, except years and per share data)
Balance as of January 1, 2020		23,717			77,784			1.52				9.07		44,677
Granted		(33,448	)		33,448			2.09		1.47
Exercised		—			(11,317	)		0.69
Repurchased		244			—			—
Forfeited		16,355			(16,355	)		1.34
Balance as of September 30, 2020		6,868			83,560			1.89				8.97		516,235
Options vested and expected to vest as of September 30, 2020		—			73,569			1.87				8.93		456,002
Options vested and exercisable as of September 30, 2020		—			20,230			1.53				8.13		132,387

Restricted Stock Unit Activity—A summary of all restricted stock units activity for the 2016 Plan for the nine months ended September 30, 2020 was as follows:

	Class A Restricted Stock Units
	Restricted Stock Units Outstanding		Weighted- Average Grant Date Fair Value Per Share
	(in thousands, except per share data)
Unvested balance as of January 1, 2020		16,516	$	1.97
Granted		—		—
Vested		—		—
Forfeited		—		—
Unvested balance as of September 30, 2020		16,516	$	1.97

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As of September 30, 2020, there was $21.1 million of total unrecognized compensation cost related to restricted stock units granted under the Company’s 2016 Plan. That cost is expected to be recognized over a weighted-average period of 2.2 years.

Awards with Service-Based Vesting Conditions Granted under the 2016 Plan

During the nine months ended September 30, 2020 and 2019, the Company granted 28,998,127 and 44,121,159 awards with service-based conditions, respectively. During the nine months ended September 30, 2020 and 2019, the Company modified 1,450,451 and 2,961,156 options with service-based conditions from the 2016 Plan. See “Modification of Stock Options”.

Awards with Performance-Based Vesting Conditions Granted under the 2016 Plan

During the year ended December 31, 2016, the Company granted restricted stock awards of 5,714,286 shares of Class B common stock that vest upon satisfaction of performance or service-based conditions. During the nine months ended September 30, 2020, all 5,714,286 shares vested upon meeting the service-based condition.

During the year ended December 31, 2017, the Company granted options to purchase 4,180,021 shares of Class A common stock to employees that vested upon satisfaction of performance-and service-based conditions. The options vested over a period of 4 years with 25% vesting upon the first anniversary of the grant date and 1/48th vesting at the end of each month thereafter. During the year ended December 31, 2017, a performance-based condition was satisfied and as a result, vesting of one-third of these options was accelerated. During the nine months ended September 30, 2019, a second performance-based condition was satisfied and as a result, vesting of the remaining options was accelerated.

During the year ended December 31, 2018, the Company granted options to purchase 1,500,000 shares of Class A common stock that vest upon satisfaction of performance-based conditions. During the year ended December 31, 2018, 500,000 shares vested after the related performance-based condition was met. In addition, 500,000 shares were forfeited due to the related performance-based condition not being met by December 31, 2018. During the nine months ended September 30, 2020, the remaining 500,000 shares were forfeited due to the related performance-based condition not being met prior to the termination of the respective agreement.

During the year ended December 31, 2019, the Company granted options to purchase 1,743,300 of Class A common stock to one of the Company’s executives. The options will commence vesting upon meeting certain performance-based conditions, over a period of four years, with 1/48th of the total award vesting upon each monthly anniversary of the vesting commencement date. The grant date fair value per share of these options was $1.69 and the aggregate grant date fair value was $3.0 million. As of September 30, 2020, no options have been exercised, no options have vested, and no expense has been recognized for these awards as the performance-based conditions are not yet considered probable of being met.

During the year ended December 31, 2019, the Company granted options to purchase 3,506,222 of Class A common stock to two of the Company’s executives. The options will commence vesting upon the achievement of certain performance-based conditions, over a period of three years, with 1/36^th vesting upon each monthly anniversary of such vesting commencement date. The grant date fair value per share of these options was $1.69 and the aggregate grant date fair value was $5.9 million. As of September 30, 2020, no options have been exercised, no options have vested, and no expense has been recognized for these awards as the performance-based conditions are not yet considered probable of being met.

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During the nine months ended September 30, 2020, the Company granted options to purchase 1,700,000 shares of Class A common stock to one of the Company’s executives. The options will commence vesting upon the achievement of certain performance-based conditions, over a period of three years, with 1/36^th vesting upon each monthly anniversary of such vesting commencement date. The grant date fair value per share of these options was $1.68 and the aggregate grant date fair value was $2.9 million. As of September 30, 2020, no options have been exercised, no options have vested, and no expense has been recognized for these awards as the performance-based conditions are not yet considered probable of being met.

During the nine months ended September 30, 2020, the Company granted options to purchase 750,000 shares of Class A common stock to one of the Company’s executives. The options will commence vesting upon meeting certain performance-based conditions, over a period of two years, with 25% vesting upon the vesting commencement date, and 3.125% vesting upon each monthly anniversary of such vesting commencement date. The grant date fair value per share of these options was $1.68 and the aggregate grant date fair value was $1.3 million. As of September 30, 2020, no options have been exercised, no options have vested, and no expense has been recognized for these awards as the performance-based conditions are not yet considered probable of being met.

During the nine months ended September 30, 2020, the Company granted options to purchase 2,000,000 shares of Class A common stock to one of the Company’s executives. Of these awards, 1,000,000 will commence vesting upon the achievement of certain performance-based conditions, over a period of three years, with 1/36^th vesting on the monthly anniversary of the vesting commencement date. The remaining 1,000,000 awards vest over a period of a year, with 50% vesting upon the achievement of certain performance-based conditions and the remainder 50% vesting upon the first anniversary of such vesting commencement date. The grant date fair value per share of these options was $1.74 and the aggregate grant date fair value was $3.5 million. As of September 30, 2020, no options have been exercised, no options have vested, and no expense has been recognized for these awards as the performance-based conditions are not yet considered probable of being met.

Awards with Performance-and Market-Based Vesting Conditions Granted under the 2016 Plan

During the year ended December 31, 2018, the Company granted options to purchase 4,883,947 shares of Class A common stock that vest upon satisfaction of performance-and market-based conditions. The performance-based condition is satisfied upon the Company successfully executing an IPO of the Company’s common stock and achieving certain performance conditions. The market-based condition is satisfied upon the Company maintaining certain market capitalization levels after the IPO. For these options, the Company uses a Monte Carlo simulation to determine the fair value at the grant date and the implied service period. As of September 30, 2020, 4,562,445 shares have been forfeited.

Non-Plan Incentive Awards

During the year ended December 31, 2016, the Company granted restricted stock awards of 1,125,000 shares of Class A common stock outside of the 2016 Plan. Of these awards, 1,000,000 will vest over a period of 4 years with 1/48^th vesting on the monthly anniversary of the grant date with the exception of accelerating events relating to certain performance-based conditions. The remaining 125,000 awards vest over a period of 4 years with 25% vesting upon the first anniversary of the grant date and 1/48^th vesting at the end of each month thereafter. During the nine months ended September 30, 2020 and 2019, 135,417 and 210,937 of these awards vested, respectively. As of September 30, 2020, these awards are fully vested.

During the year ended December 31, 2018, the Company granted 28,683,500 options to purchase Class A common stock outside of the 2016 Plan to two of the Company’s executives. Of these options,

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21,453,125 vest over a period of 4 years with 25% vesting upon the first anniversary of the grant date and 1/48^th vesting at the end of each month thereafter. The grant date fair value per share was $0.45 and the aggregate grant date fair value was $9.7 million. During the nine months ended September 30, 2019, 8,279,501 of these options were forfeited. As of September 30, 2020, 476,191 of these options had been early exercised. During the nine months ended September 30, 2019, the remaining 7,230,375 options related to performance-and market-based conditions were cancelled.

During the nine months ended September 30, 2019, the Company granted restricted stock units of 13,827,568 shares of Class A common stock outside of the 2016 Plan. These units have an expiration term of 10 years and they vest over a period of 3 years with 67% vesting upon the second anniversary of the vesting start date and the remaining 33% vesting on the third anniversary of the vesting start date. The weighted-average grant date fair value per share for these units was $1.92 and the aggregate grant date fair value was $26.5 million.

During the nine months ended September 30, 2019, the Company modified 10,658,214 options granted outside of the 2016 Plan with service-based conditions. See “Modification of Stock Options”.

The Non-Plan Incentive options outstanding as of September 30, 2020 had a weighted-average exercise price of $0.93 per share.

Early Exercise of Stock Options

Certain options granted under the 2016 Plan and Non-Plan Incentive Awards have been early exercised. The unvested shares are subject to a repurchase right held by the Company at the original purchase price. The proceeds initially are recorded as a liability for early exercise of unvested options and reclassified to additional paid-in capital as the repurchase right lapses.

The Company issued 302,667 and 223,668 shares of common stock upon the early exercise of options during the nine months ended September 30, 2020 and 2019, respectively, for total exercise proceeds of $0.4 million and $0.2 million, respectively.

Shares Subject to Repurchase

As of September 30, 2020, 570,925 shares held by employees and directors were subject to the Company’s right of repurchase at an aggregate price of $0.7 million.

Modification of Stock Options

During the nine months ended September 30, 2019, the Company entered into agreements with nine employees, as a result of which the terms of certain of their service-based options to purchase shares of Class A common stock were modified. As a result of these modifications, the vesting of 6,126,145 options were accelerated as of the date of the agreements, and 13,462,736 of the vested options had their exercise period extended. The Company accounted for the changes to the options as modifications, and the fair value of their service-based options was increased by $8.8 million which was recorded as an incremental expense during the nine months ended September 30, 2019.

During the nine months ended September 30, 2020, the Company entered into agreements with four employees, as a result of which the terms of certain of their service-based options to purchase shares of Class A common stock were modified. As a result of these modifications, the vesting of 70,578 options were accelerated as of the date of the agreements, and 1,443,623 of the vested options had their exercise period extended. The Company accounted for the changes to the options as modifications, and the fair value of their service-based options was increased by $0.3 million which was recorded as an incremental expense during the nine months ended September 30, 2020.

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Stock-Based Compensation Expense

The following table is a summary of stock-based compensation expense recognized for the three and nine months ended September 30, 2020 and 2019 for employees and non-employees for both the 2016 Plan and Non-Plan Incentive Awards:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
	(in thousands)
Research and development	$	1,964	$	865	$	4,921		2,460
Research and development—related parties		90		34		120		101
Marketing		668		75		1,898		88
General and administrative		7,624		9,130		27,354		15,134
Total stock-based compensation expense	$	10,346	$	10,104	$	34,293	$	17,783

As of September 30, 2020, the total unrecognized stock-based compensation expense for awards that contain service-based conditions for both the 2016 Plan and Non-Plan Incentive Awards was $100.6 million, which is expected to be recognized over a weighted-average period of approximately 2.76 years. As of September 30, 2020, the total unrecognized stock-based compensation expense for awards that contain only performance-based or performance-and market-based conditions for both the 2016 Plan and Non-Plan Incentive Awards was $16.5 million.

Liability-Classified Awards with Performance-and Market-Based Vesting Conditions Granted under the 2016 Plan

In February 2016, the Company entered into an agreement with a former executive officer pursuant to which he was eligible to receive $10.0 million in incentive awards. During the nine months ended September 30, 2020, these incentive awards were forfeited.

In October 2017, the Company entered into a transition agreement with the vice chairperson of the board of directors. Under the transition agreement, the individual was eligible to receive up to $130.0 million in incentive awards. During the nine months ended September 2020, the transition agreement was modified. The modification changed the performance-based conditions and the market-based conditions were eliminated. See “Liability-Classified Awards with Performance-Based Vesting Conditions Granted under the 2016 Plan”.

In June 2018, the Company entered into a separation agreement with a former executive. Under the agreement, the individual was eligible to receive up to $8.0 million in incentive awards. During the nine months ended September 30, 2020, these incentive awards were forfeited.

As of September 30, 2020 and September 30, 2019, the Company had not recognized any compensation expense associated with these awards as the achievement of the performance-and market-based conditions was not deemed to be probable.

Liability-Classified Awards with Performance-Based Vesting Conditions Granted under the 2016 Plan

During the nine months September 2020, the Company modified the transition agreement with the vice chairperson of the board of directors, and the under the new agreement, he is eligible to receive up to $78.0 million in incentive awards.

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The incentive awards for the vice chairperson of the board of directors are granted subject to the respective individual’s continued service to the Company. The awards are earned upon the satisfaction of certain performance-based conditions based on cumulative net revenues in any period of four consecutive quarters.

The above incentive awards for the vice chairperson of the board of directors will be paid, at the Company’s election, in fully vested shares of Class B common stock (or securities into which the Class B common stock has previously been converted) or in cash. The dollar value of these incentive awards is based on the achievement of the performance-based conditions described above. The number of shares is variable based on the per-share valuation at the time the performance-based conditions are met. Accordingly, these awards are accounted for as liability-classified awards, and, once the related performance-based conditions are deemed to be probable, the liability will be remeasured at fair value on each reporting date until the awards vest.

As of September 30, 2020, the Company had not recognized any compensation expense associated with these awards as the achievement of the performance-based condition was not deemed to be probable.

NOTE 11. RELATED-PARTY TRANSACTIONS

Illumina Agreements

Beginning May 4, 2020, Mostafa Ronaghi has served as a member of the Company’s board of directors. Dr. Ronaghi was also the Chief Technology Officer of Illumina, Inc. (Illumina) through May 2020 and is currently the Senior Vice President of Entrepreneurial Development of Illumina. Illumina is a principal owner of the Company and is a major supplier of the Company’s reagents and capital equipment. On September 20, 2020, the Company entered into an Agreement and Plan of Merger with Illumina, Inc., SDG Ops, Inc., a wholly-owned subsidiary of Illumina, and SDG Ops, LLC, a Delaware limited liability company and a wholly owned subsidiary of Illumina (the “Merger Agreement”) pursuant to which Illumina will acquire the Company. Refer to Note 1 for additional details.

In January 2019, pursuant to the Company’s supply and commercialization with Illumina, which was entered into in January 2016 and subsequently amended in September 2017, the Company paid Illumina $15.0 million related to its data delivery requirements under a supply and commercialization agreement with Illumina. In February 2019, pursuant to the terms of the Company’s supply and commercialization agreement with Illumina, the Company entered into two separate non-exclusive and non-sublicensable license agreements with Illumina. Under these license agreements, the Company sublicensed to Illumina rights to patents and technology in-licensed from other collaboration partners. Under these license agreements, Illumina is required to pay the Company (i) initial aggregate licensing fees of $50,000 and (ii) annual minimum aggregate royalties of $50,000, increasing by $10,000 annually to a max of $100,000, and (iii) running royalties in the low percentages of net sales of products utilizing in-licensed technology. In addition, one of the license agreements include a milestone of $50,000 tied to the first commercial sale of a product covered by a licensed patent. During the nine months ended September 30, 2019, Illumina paid the Company $0.2 million associated with licensing fees, minimum royalties, and achievement of the milestone. No amounts were paid by Illumina during the three or nine months ended September 30, 2020.

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Transactions with Illumina under a supply and commercialization agreement as well as for limited services rendered by Illumina on the Company’s behalf that have been reflected in the condensed consolidated financial statements are as follows:

	As of
	September 30, 2020		December 31, 2019
	(in thousands)
Prepaid service arrangements	$	738	$	567
Property and equipment, net		281		1,252
Accounts payable		1,390		151

	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
	(in thousands)
Research and development	$	2,873	$	3,085	$	6,936	$	7,143

Dr. Klausner Consulting Agreement

Effective May 2016, the Company entered into a consulting agreement with Richard Klausner, M.D. Dr. Klausner is: (i) a member of the board of directors of the Company; and (ii) has performed advisory consulting services. The compensation under the consulting agreement consists of options to purchase 876,000 shares of Class A common stock at an exercise price of $0.23 per share that were granted in 2016 and reimbursement of certain out of pocket expenses. In May 2018, in connection with Dr. Klausner’s consulting service, the Company granted him additional options to purchase 450,000 shares of Class A common stock at an exercise price of $1.74 per share. In August 2020, in connection with Dr. Klausner’s consulting agreement, the Company granted him options to purchase 1,400,000 shares of Class A common stock at an exercise price of $2.09 per share.

Agilent Arrangements

Since August 2018, Hans Bishop has served as a member of the Company’s board of directors. During June 2019, Mr. Bishop was appointed as the Company’s chief executive officer. Mr. Bishop is also on the board of directors of Agilent Technologies, Inc. (Agilent). Agilent is a supplier to the Company. During the three and nine months ended September 30, 2020, the Company placed purchase orders with Agilent pursuant to which the Company incurred $0.1 million and $0.3 million in research and development expenses, respectively. During the three and nine months ended September 30, 2019, the Company placed purchase orders with Agilent pursuant to which the Company incurred $0.1 million and $0.5 million in research and development expenses, respectively. As of both September 30, 2020 and December 31, 2019, $0.1 million of property and equipment that the Company purchased from Agilent is reflected in the condensed consolidated balance sheets. As of both September 30, 2020 and December 31, 2019, $0.1 million is reflected in accounts payable—related parties in the condensed consolidated balance sheets.

Collaboration Agreement with Janssen Biotech, Inc.

Johnson & Johnson UK Treasury Company Limited (J&J UK Treasury) and Janssen Biotech, Inc. (Janssen) are subsidiaries of Johnson & Johnson Inc. (J&J). As of September 30, 2020 and December 31, 2019, J&J UK Treasury was a minority stockholder of the Company. In December 2019, the Company entered into a testing resources and collaboration agreement with Janssen. In January 2020, the Company received $2.5 million in payment for services to be performed under this agreement. As of September 30, 2020, $2.5 million is reflected in other current liabilities—related party in the condensed consolidated balance sheet.

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NOTE 12. NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS

The following table presents the calculation of basic and diluted net loss per share attributable to Class A and Class B common stockholders:

	Three Months Ended September 30,
	2020						2019
	Class A			Class B			Class A			Class B
	(in thousands, except share and per share data)
Numerator
Net loss	$	(65,816	)	$	(14,564	)	$	(51,774	)	$	(8,906	)
Net loss attributable to Class A and Class B common stockholders
Basic and diluted	$	(65,816	)	$	(14,564	)	$	(51,774	)	$	(8,906	)
Denominator
Weighted-average shares of Class A and Class B common stock used in computing net loss per share attributable to Class A and Class B common stockholders
Basic and diluted		112,932,610			24,989,397			106,448,884			18,311,939
Net loss per share attributable to Class A and Class B common stockholders
Basic	$	(0.58	)	$	(0.58	)	$	(0.49	)	$	(0.49	)
Diluted	$	(0.58	)	$	(0.58	)	$	(0.49	)	$	(0.49	)

	Nine Months Ended September 30,
	2020						2019
	Class A			Class B			Class A			Class B
	(in thousands, except share and per share data)
Numerator
Net loss	$	(178,262	)	$	(38,534	)	$	(151,813	)	$	(26,067	)
Net loss attributable to Class A and Class B common stockholders
Basic and diluted	$	(178,262	)	$	(38,534	)	$	(151,813	)	$	(26,067	)
Denominator
Weighted-average shares of Class A and Class B common stock used in computing net loss per share attributable to Class A and Class B common stockholders
Basic and diluted		110,574,714			23,902,327			104,206,885			17,893,184
Net loss per share attributable to Class A and Class B common stockholders
Basic	$	(1.61	)	$	(1.61	)	$	(1.46	)	$	(1.46	)
Diluted	$	(1.61	)	$	(1.61	)	$	(1.46	)	$	(1.46	)

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As the Company was in a net loss position for all periods presented, basic net loss per share is the same as diluted net loss per share because the inclusion of potential shares of common stock would have been anti-dilutive. The following common stock equivalents were therefore excluded from the computation of diluted net loss per share for the periods presented:

	As of September 30,
	2020		2019
Redeemable convertible preferred stock (on an if-converted basis)		534,145,027		457,401,191
Options to purchase common stock and restricted stock units		126,600,727		101,381,330
Shares subject to repurchase		570,925		8,303,896
Total		661,316,679		567,086,417

NOTE 13. SUBSEQUENT EVENTS

The Company has reviewed and evaluated subsequent events through November 24, 2020, the date the unaudited condensed consolidated financial statements were available to be issued. In connection with the reissuance of the unaudited condensed consolidated financial statements, the Company has evaluated subsequent events through March 12, 2021, the date the unaudited condensed consolidated financial statements were available to be reissued.

In October 2020, the Company modified certain restricted stock awards that were granted to one of the Company’s executives. Under the terms of the modified award, the individual is eligible to receive 5,230,200 restricted stock awards based on the achievement of certain performance- and service-based vesting conditions.

On January 1, 2021, the number of authorized shares of common stock that may be issued under the 2016 Plan increased by 27,062,279 shares pursuant to the automatic share increase provision of the plan.

Subsequent to September 30, 2020, the Company granted 11,603,697 restricted stock units (RSUs) of Class A common stock to employees. Subject to continued service, the RSUs will generally vest upon the satisfaction of certain performance- and service-based conditions, over a period of 4 to 5 years, and had a fair market value on the grant dates of $97.3 million.

Subsequent to September 30, 2020, in accordance with the terms of the Merger Agreement, the Company received Continuation Payments totaling $105 million in cash from Illumina in December 2020, January 2021 and February 2021.

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EX-99.3

Exhibit 99.3

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

On September 20, 2020, Illumina, Inc. entered into the Agreement and Plan of Merger (as amended on February 4, 2021 by the Amendment to the Agreement and Plan of Merger, the “Merger Agreement”) with GRAIL, Inc. (“GRAIL”) and two of Illumina’s wholly owned subsidiaries, pursuant to which, through two successive mergers (the “Mergers”), it will acquire GRAIL (the “Transaction”).

As a result of the Transaction, each share of Class A Common Stock, par value $0.001 per share, Class B Common Stock, par value $0.001 per share, Series A Preferred Stock, par value $0.001 per share, Series B Preferred Stock, par value $0.001 per share, Series C Preferred Stock, par value $0.001 per share, and Series D Preferred Stock, par value $0.001 per share, of GRAIL (collectively, “GRAIL Stock”) issued and outstanding immediately prior to the effective time of the first merger (the “Effective Time”) (other than cancelled shares or dissenting shares) will be automatically converted into, at the holder’s election, either:

• The right to receive (i) an amount in cash, without interest, equal to the amount obtained by dividing $3,500,000,000 plus the Aggregate Option Exercise Price (as defined below) by the GRAIL Fully Diluted Share Count (as defined in the Merger Agreement) (the “Cash Consideration”), plus (ii) a number of shares of common stock, par value $0.01 per share, of Illumina (the “Illumina Common Stock”) obtained by dividing the Aggregate Stock Consideration (as defined in the Merger Agreement) by the GRAIL Fully Diluted Share Count (the “Stock Consideration”), plus (iii) one contingent value right (a “CVR”) issued by Illumina, subject to and in accordance with the CVR Agreement (as defined in the Merger Agreement) (the “CVR Consideration”); or

• The right to receive (i) the Cash Consideration, plus (ii) the Stock Consideration, plus (iii) a number of shares of Illumina Common Stock and/or an amount in cash, such number and/or amount to be determined by Illumina in its sole discretion (the “Alternative Consideration”).

In accordance with the terms of the Merger Agreement, Illumina has set the Alternative Consideration at a number of shares of Illumina Common Stock obtained by dividing the Aggregate Alternative Consideration (as defined below) by the GRAIL Fully Diluted Share Count.

“Aggregate Option Exercise Price” means: the aggregate exercise price of all Company Stock Options (as defined in the Merger Agreement) that are outstanding as of immediately prior to the Effective Time.

“Aggregate Alternative Consideration” means: (i) if the Average Illumina Stock Price (as defined below) is an amount greater than or equal to $280, then the Aggregate Alternative Consideration will be a number of shares of Illumina Common Stock equal to the quotient obtained by dividing (x) $850,000,000 by (y) the Average Illumina Stock Price or (ii) if the Average Illumina Stock Price is an amount less than $280, then the Aggregate Alternative Consideration shall be 3,035,714 shares of Illumina Common Stock.

“Average Illumina Stock Price” means: the volume-weighted average trading price of a share of Illumina Common Stock on The NASDAQ Global Select Market over the twenty (20) consecutive trading day period ending on (and including) the trading day that is ten (10) trading days prior to the date of the Effective Time, rounded to four (4) decimal places.

The following unaudited pro forma condensed combined financial information combines the historical financial statements of Illumina and GRAIL, after giving effect to the Transaction and related financing. The unaudited pro forma condensed combined balance sheet is presented as if the Transaction and related financing occurred as of January 3, 2021. The unaudited pro forma condensed combined statement of operations for the twelve months ended January 3, 2021 gives effect to the acquisition as if the Transaction and related financing had occurred on December 30, 2019, the beginning of such period. The unaudited pro forma condensed combined financial information is based on the historical consolidated financial statements of Illumina and GRAIL, and the assumptions and adjustments set forth in the accompanying explanatory notes. The unaudited pro forma condensed combined financial information was prepared using the acquisition method of accounting for business combinations with Illumina considered the acquirer of GRAIL for accounting purposes. See “Note 2 – Basis of presentation” below.

Illumina’s fiscal year is the 52 or 53 weeks ending the Sunday closest to December 31, with quarters of 13 or 14 weeks ending closest to March 31, June 30, September 30 and December 31. GRAIL’s fiscal year is the calendar year. In accordance with the financial statement requirements contained in Article 11 of Regulation S-X, pro forma condensed combined financial information is presented as outlined below:

• The unaudited pro forma condensed combined balance sheet as of January 3, 2021 is presented as if Illumina’s acquisition of GRAIL had occurred on January 3, 2021, and combines the historical audited consolidated balance sheet of Illumina as of January 3, 2021 with the historical unaudited condensed consolidated balance sheet of GRAIL as of September 30, 2020.

• The unaudited pro forma condensed statement of operations for the twelve months ended January 3, 2021 is presented as if Illumina’s acquisition of GRAIL had occurred on December 30, 2019, and combines the historical audited consolidated statement of income of Illumina for the fiscal year ended January 3, 2021 with the adjusted historical consolidated statement of operations of GRAIL for the trailing twelve months ended September 30, 2020. GRAIL’s adjusted historical consolidated statement of operations for the trailing twelve months ended September 30, 2020 was derived by taking GRAIL’s historical results of operations for the fiscal year ended December 31, 2019, deducting GRAIL’s historical results of operations for the nine months ended September 30, 2019 and adding GRAIL’s historical results of operations for the nine months ended September 30, 2020.

The unaudited pro forma condensed combined financial information was derived from and should be read in conjunction with the following historical financial statements and notes: (a) the audited consolidated financial statements of Illumina as of and for the year ended January 3, 2021, contained in its Annual Report on Form 10-K for the fiscal year then ended filed with the Securities and Exchange Commission on February 17, 2021; (b) the audited consolidated financial statements of GRAIL as of and for the year ended December 31, 2019, contained in Exhibit 99.1 to this Current Report on Form 8-K; and (c) the unaudited condensed consolidated financial statements of GRAIL as of September 30, 2020 and for the nine months ended September 30, 2020 and 2019, contained in Exhibit 99.2 of this Current Report on Form 8-K.

1

The acquisition of GRAIL will be accounted for as a business combination and will reflect the application of acquisition accounting in accordance with Accounting Standards Codification (ASC) 805, Business Combinations (“ASC 805”). For purposes of developing the unaudited pro forma condensed combined balance sheet as of January 3, 2021, the acquired GRAIL assets, including identifiable intangible assets and liabilities assumed, have been recorded at their estimated fair values with the excess purchase price assigned to goodwill. The pro forma adjustments are based on preliminary estimates of the fair values of assets acquired and liabilities assumed and information available as of March 4, 2021. Detailed valuations and assessments, including valuations of intangible assets, the CVRs, Illumina’s previously held GRAIL investment, share-based compensation awards as well as the assessment of the tax positions and rates of the combined business, are in process and will not be completed until after the closing of the Transaction. The estimated fair values assigned in this unaudited pro forma condensed combined financial information are preliminary and represent Illumina’s current best estimate of fair value and are subject to revision. Additionally, the number of shares of GRAIL STOCK or options to purchase shares of GRAIL Class A Common Stock, award of restricted stock units with respect to shares of GRAIL Class A Common Stock or award of restricted shares of GRAIL Class A Common Stock (collectively, the “GRAIL Equity Awards”) for which the Alternative Consideration will be elected in lieu of the CVR Consideration cannot be predicted. Accordingly, actual adjustments to the combined company’s financial statements following the acquisition could differ, perhaps materially, from those reflected in the unaudited pro forma condensed combined financial information because the purchase price, assets and liabilities acquired and share-based compensation awards will be recorded at their respective fair values on the date the acquisition is consummated.

GRAIL’s stockholders and holders of vested GRAIL Equity Awards will be provided with the option to elect the right to receive for each share of GRAIL Stock owned and each vested GRAIL Equity Award held by such individual: (i) the Cash Consideration, the Stock Consideration, plus one CVR issued by Illumina (collectively referred to as the “CVR Consideration”) or (ii) the Cash Consideration, the Stock Consideration, plus, and in lieu of a CVR, the Alternative Consideration (collectively the “Non-CVR Consideration”), in each case, for GRAIL Stock Options, less the value of the applicable exercise price. Illumina cannot predict the number of shares or vested GRAIL Equity Awards for which the Alternative Consideration will be elected in lieu of a CVR. As described in the accompanying notes below, the number of shares or vested GRAIL Equity Awards for which the Non-CVR Consideration is elected may impact the mix of equity and CVR consideration payable to the GRAIL stockholders. Accordingly, Illumina is providing unaudited pro forma condensed combined financial information for two alternative scenarios, one which assumes that none of the GRAIL stockholders elects the right to receive the Non-CVR Consideration, and one which assumes that all of the GRAIL stockholders elect the right to receive the Non-CVR Consideration.

The value of the stock component of the purchase price may fluctuate with the market price of Illumina Common Stock and with the number of Illumina shares issued, determined based on the weighted average trading price of Illumina Common Stock for the 20 consecutive trading days ending on (and including) the trading day that is 10 trading days prior to the closing date of the Transaction (the “Closing Date”), subject, in the case of the Stock Consideration, to a collar of $295 to $399 and, in the case of the Alternative Consideration, to a floor of $280. As such, the actual purchase price may vary from the results shown.

GRAIL Equity Awards that are unvested, after taking into account the accelerated vesting as provided in the Merger Agreement, will, immediately prior to the Effective Time, be canceled in exchange for an equivalent equity award (i.e., stock options, restricted shares or restricted stock units, as applicable) with respect to shares of Illumina Common Stock. The number of shares of Illumina Common Stock subject to such converted award will be equal to the product (rounded down to the nearest whole share) of (i) the number of shares of GRAIL Stock subject to the unvested portion of the applicable GRAIL Equity Award and (ii) at the holder’s election, the CVR Consideration Award Ratio or the Non-CVR Consideration Award Ratio. If the CVR Consideration Award Ratio is elected with respect

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to an unvested GRAIL Equity Award, the holder will also receive a number of fully vested CVRs equal to the number of shares of GRAIL Stock subject to the unvested portion of such GRAIL Equity Award. Illumina cannot predict the number of unvested GRAIL Equity Awards for which the CVR Consideration Award Ratio or the Non-CVR Consideration Award Ratio will be elected. As described in the accompanying notes below, the number of converted equity awards issued may impact the fair value of share-based compensation awards attributable to pre-combination service, the fair value of share-based compensation awards attributable to post-combination service or the CVR consideration payable to equity award holders. Accordingly, Illumina is providing the unaudited pro forma condensed combined financial information for two alternative scenarios, one which assumes that none of the holders of unvested GRAIL Equity Awards elects the right to receive the Non-CVR Consideration Award Ratio, and one which assumes that all of the holders of unvested GRAIL Equity Awards elect the right to receive the Non-CVR Consideration Award Ratio.

The unaudited pro forma condensed combined financial information is shown under the following two scenarios:

(1) CVR Scenario (“Scenario 1”): Assumes none of the GRAIL stockholders elect the right to receive the Non-CVR Consideration and none of the holders of GRAIL Equity Awards elect the right to receive the Non-CVR Consideration Award Ratio.

(2) Alternative Consideration Scenario (“Scenario 2”): Assumes all of the GRAIL stockholders elect the right to receive the Non-CVR Consideration and all of the holders of GRAIL Equity Awards elect the right to receive the Non-CVR Consideration Award Ratio.

The pro forma financial information has been prepared by Illumina in accordance with Article 11 of Regulation S-X (Pro Forma Financial Information). The unaudited pro forma condensed combined financial information is provided for illustrative purposes only, does not necessarily reflect what the actual consolidated results of operations would have been had the acquisition occurred on the dates assumed and may not be useful in predicting the future consolidated results of operations or financial position. Illumina’s results of operations and actual financial position may differ significantly from the pro forma amounts reflected herein due to a variety of factors.

3

UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

AS OF JANUARY 3, 2021

(In millions)

	Historical				Pro Forma
					Scenario 1					Scenario 2										Scenario 1		Scenario 2
	Illumina		GRAIL		Transaction accounting adjustments			Notes		Transaction accounting adjustments			Notes		Other transaction accounting adjustments			Notes		Pro forma combined		Pro forma combined
ASSETS
Current assets:
Cash, cash equivalents and short-term investments	$	3,472	$	632	$	(3,048	)		A	$	(3,048	)		A	$	992			M	$	2,048	$	2,048
Accounts receivable, net		487		—		(1	)		B		(1	)		B		—					486		486
Inventory		372		—		—					—					—					372		372
Prepaid expenses and other current assets		152		7		—					—					(7	)		N		152		152
Total current assets		4,483		639		(3,049	)				(3,049	)				985					3,058		3,058
Property and equipment, net		922		25		—					—					—					947		947
Operating lease right-of-use assets		532		52		—					—					—					584		584
Goodwill		897		—		6,585			C		6,039			C		—					7,482		6,936
Intangible assets, net		142		—		2,630			C		2,630			C		—					2,772		2,772
Deferred tax assets, net		20		—		—					—					—					20		20
Other assets		589		11		(250	)		D		(250	)		D		—					350		350
Total assets	$	7,585	$	727	$	5,916				$	5,370				$	985				$	15,213	$	14,667
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	192	$	8	$	(1	)		B	$	(1	)		B	$	—				$	199	$	199
Accrued liabilities		541		52		99			E		99			E		—					692		692
Long-term debt, current portion		511		—		—					—					—					511		511
Total current liabilities		1,244		60		98					98					—					1,402		1,402
Operating lease liabilities		671		54		—					—					—					725		725
Long-term debt		673		—		—					—					992			M		1,665		1,665
Other long-term liabilities		303		3		58			F		74			F		—					1,782		380
						1,165			G		—
						253			G		—

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	Historical						Pro Forma
							Scenario 1					Scenario 2										Scenario 1			Scenario 2
	Illumina			GRAIL			Transaction accounting adjustments			Notes		Transaction accounting adjustments			Notes		Other transaction accounting adjustments			Notes		Pro forma combined			Pro forma combined
Redeemable convertible preferred stock:
Series A		—			68			(68	)		H		(68	)		H		—					—			—
Series B		—			1,235			(1,235	)		H		(1,235	)		H		—					—			—
Series C		—			300			(300	)		H		(300	)		H		—					—			—
Series D		—			392			(392	)		H		(392	)		H		—					—			—
Total redeemable convertible preferred stock		—			1,995			(1,995	)				(1,995	)				—					—			—
Stockholders’ equity (shareholders’ deficit):
Common stock		2			—			—					—					—					2			2
Additional paid-in capital		3,815			133			4,588			H		4,588			H		—					8,409			9,174
								(133	)		H		(133	)		H
								6			I		6			I
								—					639			K
													126			L
Accumulated other comprehensive income (loss)		2			4			(4	)		H		(4	)		H		—					2			2
Retained earnings (accumulated deficit)		4,723			(1,522	)		1,069			D		988			D		(7	)		N		4,836			4,868
								(99	)		E		(99	)		E
								41			F		41			F
								(253	)		G		—
								1,522			H		1,522			H
								(638	)		J		(638	)		J
								—					(140	)		L
Treasury stock, at cost		(3,848	)		—			238			H		238			H		—					(3,610	)		(3,551	)
								—					45			K
								—					14			L
Total stockholders’ equity (shareholders’ deficit)		4,694			(1,385	)		6,337					7,193					(7	)				9,639			10,495
Total liabilities, redeemable convertible preferred stock and stockholders’ equity (shareholders’ deficit)	$	7,585		$	727		$	5,916				$	5,370				$	985				$	15,213		$	14,667

See accompanying notes to the unaudited pro forma condensed combined financial information.

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UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

FOR THE TWELVE MONTHS ENDED JANUARY 3, 2021

(In millions, except per share amounts)

	Historical				Pro Forma
					Scenario 1					Scenario 2								Scenario 1		Scenario 2
	Illumina		GRAIL		Transaction accounting adjustments			Notes		Transaction accounting adjustments			Notes		Other transaction accounting adjustments		Notes	Pro forma combined		Pro forma combined
Revenue:
Product revenue	$	2,735	$	—	$	(6	)		O	$	(6	)		O	$	—		$	2,729	$	2,729
Service and other revenue		504		—		—					—					—			504		504
Total revenue		3,239		—		(6	)				(6	)				—			3,233		3,233
Cost of revenue:
Cost of product revenue		788		—		—					—					—			788		788
Cost of service and other revenue		220		—		—					—					—			220		220
Amortization of acquired intangible assets		28		—		—					—					—			28		28
Total cost of revenue		1,036		—		—					—					—			1,036		1,036
Gross profit		2,203		—		(6	)				(6	)				—			2,197		2,197
Operating expense:
Research and development		682		175		43			G		—					—			1,117		1,099
						9			I		9			I
						108			J		108			J
						—					24			L
						(6	)		O		(6	)		O
						106			P		106			P
											1			Q
Selling, general and administrative		941		112		99			E		99			E		—			1,903		1,816
						210			G		—
						43			I		43			I
						530			J		530			J
						—					116			L
						3			P		3			P
						—					7			Q
						(35	)		R		(35	)		R
Total operating expense		1,623		287		1,110					1005					—			3,020		2,915

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	Historical						Pro Forma
							Scenario 1					Scenario 2										Scenario 1			Scenario 2
	Illumina			GRAIL			Transaction accounting adjustments			Notes		Transaction accounting adjustments			Notes		Other transaction accounting adjustments			Notes		Pro forma combined			Pro forma combined
Income (loss) from operations		580			(287	)		(1,116	)				(1,011	)				—					(823	)		(718	)
Other income (expense):
Interest income		41			7			—					—					—					48			48
Interest expense		(49	)		—			—					—					(17	)		T		(73	)		(73	)
																		(7	)		N
Other income (expense), net		284			(3	)		1,069			D		988			D		—					1,350			1,269
Total other income, net		276			4			1,069					988					(24	)				1,325			1,244
Income (loss) before income taxes		856			(283	)		(47	)				(23	)				(24	)				502			526
Provision for (benefit from) income taxes		200			—			(91	)		F		(91	)		F		(6	)		U		103			103
Consolidated net income	$	656		$	(283	)	$	44				$	68				$	(18	)			$	399		$	423
Earnings per share:
Basic	$	4.48																				$	2.55		$	2.67
Diluted	$	4.45																				$	2.54		$	2.66
Shares used in computing earnings per share:
Basic		147						10			H		10			H		—					157			158
													1			S
Diluted		148						10			H		10			H		—					158			159
													1			S

See accompanying notes to the unaudited pro forma condensed combined financial information.

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NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

1. Description of the proposed GRAIL acquisition

On September 20, 2020, Illumina entered into the Merger Agreement to acquire GRAIL for $3.5 billion in cash, plus the Aggregate Option Exercise Price of all GRAIL Stock Options, and $4.5 billion in shares of Illumina Common Stock, subject to a collar, plus an option to receive CVRs or the Alternative Consideration. On February 4, 2021, Illumina and GRAIL entered into an amendment to the Merger Agreement. The Transaction, which is expected to close in the second half of 2021, is subject to certain customary closing conditions, including the Company Stockholder Approvals (as defined in the Merger Agreement) and the receipt of required regulatory approvals.

The Cash Consideration for the Transaction is expected to be funded using balance sheet cash, plus up to $1 billion in capital raised through a debt issuance. In advance of this anticipated issuance, Illumina has obtained a bridge facility commitment letter from Goldman Sachs Bank USA for a 364-day senior unsecured bridge loan facility, in an aggregate principal amount of $1 billion. The bridge facility commitment letter is subject to certain conditions, including consummation of the Mergers pursuant to the Merger Agreement. It is anticipated that some or all of the bridge facility will be replaced or repaid by Illumina through the issuance of debt securities. Illumina ultimately does not expect to utilize the bridge facility, and if necessary, expects to be able to obtain more cost-effective, permanent debt financing at a later date. The accompanying unaudited pro forma condensed combined financial information reflects the estimated cost of borrowing under an anticipated debt financing.

In connection with the Transaction, GRAIL stockholders and holders of GRAIL Equity Awards will have the option to elect to receive CVRs, which will entitle holders to receive future payments representing a pro rata portion of certain revenues (calculated in accordance with the CVR Agreement) each year for a 12-year period. Each holder of a CVR will be entitled to receive a pro rata portion of 2.5% of Covered Revenues (as defined in the CVR Agreement), if any, up to and including $1 billion, plus 9.0% of Covered Revenues, if any, in excess of $1 billion, with such $1 billion threshold measured over an annual period to correspond with Illumina’s fiscal year. GRAIL stockholders and holders of vested GRAIL Equity Awards have the option to receive the Alternative Consideration, which is additional stock consideration, in an amount equal to $850 million in shares of Illumina Common Stock, subject to a floor price, divided by the GRAIL Fully Diluted Share Count, in lieu of the CVRs. Holders of unvested GRAIL Equity Awards have the right to receive an equity award with respect to a number of shares based on the Non-CVR Consideration Award Ratio, which is expected to result in a larger number of converted awards in lieu of holders’ receiving fully vested CVRs in addition to the converted awards.

As a result of the Transaction not being completed by December 20, 2020, on December 21, 2020, Illumina began making monthly cash payments to GRAIL of $35 million (the “Continuation Payments”). Illumina will continue making the monthly Continuation Payments to GRAIL until the earlier of the Closing Date or termination of the Merger Agreement, subject to certain exceptions. If the Merger Agreement is terminated, Illumina will receive shares of non-voting GRAIL preferred stock in respect of all Continuation Payments in excess of $315 million, subject to certain terms and conditions.

The Merger Agreement contains certain termination rights if the consummation of the Mergers does not occur on or before September 20, 2021, subject to a three-month extension related to obtaining certain required regulatory clearances. Upon termination of the Merger Agreement under specified circumstances, Illumina would be required to pay a termination fee of $300 million and make an additional $300 million investment in GRAIL in exchange for shares of non-voting GRAIL preferred stock, subject to certain terms and conditions.

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2. Basis of presentation

The accompanying unaudited pro forma condensed combined financial information gives effect to the acquisition of GRAIL by Illumina. The unaudited pro forma condensed combined financial information is based on the historical consolidated financial statements of Illumina and GRAIL, and the assumptions and adjustments set forth in these notes. In accordance with the financial statement requirements contained in Article 11 of Regulation S-X, pro forma condensed combined financial information is presented as outlined below:

• The unaudited pro forma condensed combined balance sheet as of January 3, 2021 is presented as if Illumina’s acquisition of GRAIL had occurred on January 3, 2021, and combines the historical audited consolidated balance sheet of Illumina as of January 3, 2021 with the historical unaudited consolidated balance sheet of GRAIL as of September 30, 2020.

• The unaudited pro forma condensed statement of operations for the twelve months ended January 3, 2021 is presented as if Illumina’s acquisition of GRAIL had occurred on December 30, 2019, and combines the historical audited consolidated statement of income of Illumina for the fiscal year ended January 3, 2021 with the adjusted historical consolidated statement of operations of GRAIL for the trailing twelve months ended September 30, 2020. GRAIL’s adjusted historical consolidated statement of operations for the trailing twelve months ended September 30, 2020 was derived by taking GRAIL’s historical results of operations for the fiscal year ended December 31, 2019, deducting GRAIL’s historical results of operations for the nine months ended September 30, 2019 and adding GRAIL’s historical results of operations for the nine months ended September 30, 2020.

The unaudited pro forma condensed combined financial information is provided for informational purposes only and is based on available information and reasonable assumptions. It does not purport to represent what the actual consolidated results of operations or the consolidated financial position of Illumina would have been if the acquisition occurred on the dates indicated, nor is it necessarily indicative of future consolidated results of operations or consolidated financial position. The actual financial position and results of operations will differ, perhaps significantly, from the pro forma amounts reflected herein due to a variety of factors, including access to additional information, changes in value not currently identified and changes in financial position and operating results following the date of the unaudited pro forma condensed combined financial information.

Pro forma transaction accounting adjustments are included only to the extent they are adjustments that reflect the accounting for the Transaction in accordance with U.S. GAAP.

The acquisition will be accounted for using the acquisition method of accounting with Illumina as the accounting acquirer and GRAIL as the accounting acquiree. The unaudited pro forma condensed combined financial information reflects the preliminary assessment of fair values assigned to components of the purchase price, share-based compensation awards, as well as fair values and useful lives assigned to assets acquired and liabilities assumed. Fair value estimates were based on preliminary discussions between Illumina and GRAIL and through due diligence efforts. The detailed valuation studies necessary to arrive at the required estimates of the fair values for components of the purchase price, share-based compensation awards and for the assets acquired and liabilities assumed have not yet been completed. Components of the purchase price that are subject to preparation of valuation studies to determine the appropriate fair value includes the CVRs, previously held GRAIL investment and share-based compensation awards attributable to pre-combination services. Significant assets and liabilities that are subject to preparation of valuation studies to determine the appropriate fair value adjustments include intangible assets, deferred income tax liability and accrued costs. Changes to the purchase price and the fair values of these assets and liabilities will also result in changes to goodwill recorded from the acquisition, which could be material.

9

The unaudited pro forma condensed combined financial information should be read in conjunction with the historical consolidated financial statements and accompanying notes of Illumina included in its annual report on Form 10-K for the year ended January 3, 2021.

3. Preliminary purchase price

The fair value of the purchase price in the unaudited pro forma condensed combined financial information below is based on the Illumina Common Stock’s closing price of $492.55 on February 16, 2021. The value of the purchase price will change based on fluctuations in the share price of the Illumina Common Stock, the number of GRAIL shares outstanding on the Closing Date, changes in the estimate of the fair value of the CVRs, the number of shares or GRAIL Equity Awards for which the right to receive the Non-CVR Consideration or the Non-CVR Consideration Award Ratio, as applicable, is elected and the number of GRAIL Equity Awards that are vested as of the Closing Date.

For purposes of preparation of the unaudited condensed combined pro forma financial information, the purchase price has been estimated assuming two scenarios:

(1) CVR Scenario (“Scenario 1”): Assumes none of the GRAIL stockholders elect the right to receive the Non-CVR Consideration and none of the holders of GRAIL Equity Awards elect the right to receive the Non-CVR Consideration Award Ratio

(2) Alternative Consideration Scenario (“Scenario 2”): Assumes all of the GRAIL stockholders elect the right to receive the Non-CVR Consideration and all of the holders of GRAIL Equity Awards elect the right to receive the Non-CVR Consideration Award Ratio.

The following table summarizes the components of the estimated purchase price (in millions, except per-share information):

	Scenario 1		Scenario 2
GRAIL shares outstanding, net of Illumina’s shares		613		613
Cash consideration per GRAIL share	$	4.54	$	4.54
Cash portion of purchase price		2,787		2,787
Less exercise price for vested stock options		25		25
Net cash consideration	$	2,762	$	2,762
GRAIL shares outstanding, net of Illumina’s shares		613		613
Exchange ratio		0.0140		0.0140
Illumina common shares issued		9		9
Illumina’s share price	$	492.55	$	492.55
Net stock consideration	$	4,218	$	4,218
Total estimated cash and stock portion of purchase price	$	6,980	$	6,980
Fair value of CVRs		1,165		—
Fair value of alternative consideration		—		684
Fair value of previously held GRAIL investment		1,319		1,238
Fair value of share-based compensation awards attributable to pre-combination service		263		263
Total estimated purchase price	$	9,727	$	9,165

The estimated purchase price is variable depending upon the market value of Illumina Common Stock at acquisition and upon the number of shares of Illumina Common Stock issued, determined based on the weighted average trading price of Illumina Common Stock for the 20 consecutive trading days ending on (and including) the trading day that is 10 trading days prior to the Closing Date,

10

subject, in the case of the Stock Consideration, to a collar of $295 to $399 and, in the case of the Alternative Consideration, to a floor of $280. Management performed a sensitivity analysis over the change in the fair value of the purchase price, exclusive of either the CVR or the Alternative Consideration. A change in the market price of Illumina Common Stock of +- 50% from the price of $492.55 would result in a purchase price $2.4 billion higher or $1.6 billion lower, which would have been reflected as an offsetting adjustment to goodwill in the unaudited pro forma condensed combined balance sheet.

The preliminary estimated fair value of the CVRs was derived using a Monte Carlo simulation and could change materially once the final valuation is determined.

The estimated value of the Alternative Consideration attributable to the purchase price is the product of the estimated Alternative Consideration Exchange Ratio, the number of shares held by GRAIL Shareholders, excluding Illumina, and the stock price on February 16, 2021 of $492.55. The estimated Alternative Consideration Exchange Ratio of 0.0024 is equal to the $850M Alternative Consideration offer divided by the 20-trading day volume weighted average price (assumed to be $441.75) divided by the GRAIL Fully Diluted Share Count.

The preliminary estimate of the fair value of Illumina’s previously held GRAIL investment is based on the overall purchase consideration and Illumina’s percentage ownership of GRAIL prior to the acquisition.

The preliminary estimate of the fair value of share-based compensation awards attributable to pre-combination service relates to GRAIL Equity Awards that will vest upon acceleration as provided in the Merger Agreement or will be converted into options to purchase shares of Illumina Common Stock, awards with respect to restricted shares of Illumina Common Stock or restricted stock units with respect to Illumina Common Stock, as applicable. Additionally, holders of GRAIL Equity Awards may also receive CVRs based on terms specified in the Merger Agreement. The fair value of the converted share-based compensation awards attributable to pre-combination service will be recognized as part of the purchase price, and the fair value of the converted share-based compensation awards attributable to post-combination service will be recognized as expense over the post-combination service period.

The number of shares of Illumina Common Stock issued to holders of GRAIL Stock and converted share-based compensation awards is dependent on the number of GRAIL shares and share-based compensation awards outstanding on the Closing Date.

For purposes of this pro forma analysis, the above estimated purchase price has been allocated as follows based on a preliminary estimate of the fair value of assets and liabilities to be acquired as of January 3, 2021:

	Scenario 1			Scenario 2
Assets acquired	$	727		$	727
Developed technology		2,110			2,110
IPR&D		490			490
Tradename		30			30
Goodwill		6,585			6,039
Deferred tax liability		(99	)		(115	)
Liabilities assumed	$	(116	)	$	(116	)
Total estimated purchase price	$	9,727		$	9,165

This preliminary purchase price allocation has been used to prepare the Transaction accounting adjustments in the unaudited pro forma condensed combined financial information. The final purchase

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price allocation will be determined when Illumina has completed the detailed valuations and necessary calculations as described in more detail in the explanatory notes below. The final allocation is expected to be completed within the measurement period, as defined in ASC 805, following the close of the Transaction and could differ materially from the preliminary allocation used in the Transaction accounting adjustments detailed below.

4. Transaction accounting adjustments

Adjustments included in the column under the headings “Transaction accounting adjustments” in the balance sheet depict the accounting for the acquisition required by U.S. GAAP and in the statement of operations for the twelve months ended January 3, 2021 depict the effects of the pro forma balance sheet adjustments, assuming those adjustments were made as of December 30, 2019. Transaction accounting adjustments reflect the application of required accounting to the Transaction for the two scenarios contemplated as described above, applying the effects of the acquisition of GRAIL to Illumina’s historical financial information. Adjustments included in the column under the heading “Other transaction accounting adjustments” represent the related financing of the GRAIL acquisition.

The Transaction accounting adjustments and the Other transaction accounting adjustments included in the unaudited pro forma condensed combined financial information are as follows:

A. To record the net cash paid to GRAIL stockholders, net of Illumina’s shares of GRAIL stock, of $2.8 billion and net cash paid to holders of accelerated share-based compensation awards of $286 million.

B. To adjust the accounts receivable for the amounts due from GRAIL generated prior to the acquisition. Any payments owed from GRAIL prior to the closing of the Transaction will not be included in the assets acquired.

C. To record the estimated fair value of the intangible assets and goodwill from the acquisition. Goodwill, representing the excess of the purchase price over the fair value of the net assets to be acquired, is estimated to be $6.6 billion in Scenario 1 and $6.0 billion in Scenario 2. The difference in estimated goodwill between Scenario 1 and Scenario 2 is attributable to the differences in the estimated purchase price. These allocations are based on preliminary estimates and the final allocation may differ materially as changes to the initial valuation of the purchase price or net assets acquired will be allocated to goodwill. For each $1 billion increase or decrease in the fair value of definite-lived intangible assets assuming a weighted-average useful life of approximately 20 years, annual amortization expense would increase or decrease by approximately $50 million.

D. To remove Illumina’s investment in GRAIL of $250 million. The estimated related gain on the GRAIL investment of $1,069 million in Scenario 1 and $988 million Scenario 2 is reflected in Retained earnings (accumulated deficit) as of January 3, 2021 and in Other income (expense), net for the year ended January 3, 2021. The estimated related gain is based on Illumina’s preliminary estimated fair value of its GRAIL investment based on the estimated purchase price in Scenario 1 and Scenario 2 and may differ materially once the final fair value is determined.

E. To reflect an accrual for estimated additional Transaction costs of $99 million. Transaction costs of $50 million are included in the historical statements of income. These costs will not affect the statement of income beyond twelve months after the acquisition date.

F. To record a deferred tax liability of $99 million for Scenario 1 and $115 million for Scenario 2 for the net acquired intangibles, partially offset by net operating losses, tax credits and the elimination of the deferred tax impact of $41 million for both Scenario 1 and Scenario 2

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related to Illumina’s investment in GRAIL, which is included in retained earnings at January 3, 2021. The benefit from income taxes of $91 million for both Scenario 1 and Scenario 2 is attributable to the losses from GRAIL and the transaction accounting adjustments. These estimates are based on a preliminary review that is subject to revision as further information is gathered and interpreted.

G. To record the estimated fair value of the Scenario 1 CVR Consideration of $1.2 billion payable to GRAIL stockholders, which is reflected in the purchase price, and $253 million payable to holders of GRAIL Equity Awards, which is reflected as operating expense in the unaudited pro forma condensed combined statement of operations for the year ended January 3, 2021 and as a reduction to Retained earnings (accumulated deficit) in the unaudited pro forma condensed combined balance sheet as of January 3, 2021. Of the $253 million reflected in operating expense, $43 million is recorded to research and development expense and $210 million is recorded to selling, general and administrative expense. The preliminary estimated fair value of the CVR Consideration was derived using a Monte Carlo simulation and could change materially once the final valuation is determined.

H. To reflect the issuance of Illumina Common Stock for the Stock Consideration to GRAIL stockholders and the elimination of GRAIL’s historical balances in redeemable convertible preferred stock and stockholders’ deficit balances. The estimated issuance of 9 million and 1 million shares of Stock Consideration to GRAIL stockholders and holders of accelerated share-based compensation awards, respectively, is reflected in the shares used to calculate earnings per share and will be issued from Treasury stock, at cost of $238 million. The excess of fair value over cost of approximately $4.6 billion is reflected in additional paid in capital.

I. To record the estimated share-based compensation expense of $9 million to research and development expense and $43 million to selling, general and administrative expense for the year ended January 3, 2021 related to converted awards issued to continuing employees as part of the Mergers for the services to be provided over the post-combination service period, which is expected to occur within the first twelve months after the Closing Date. The estimated share-based compensation expense for the pre-combination services of $6 million is allocated to the purchase price and reflected as additional paid-in capital in the unaudited condensed combined pro forma balance sheet as of January 3, 2021. The preparation of valuation studies to determine the appropriate fair value and allocation of the share-based awards have not yet been completed and any resulting change in the fair value would have a direct impact to share-based compensation expense.

J. To reflect the acceleration of certain unvested shared-based awards of GRAIL at the Closing Date, the estimated fair value of the share-based compensation awards attributable to pre-combination service awards of $263 million is reflected as purchase price and the estimated fair value attributable to post-combination service of $638 million is reflected as operating expense in the unaudited pro forma condensed combined statement of operations for the year ended January 3, 2021 and as a reduction to Retained earnings (accumulated deficit) in the unaudited pro forma condensed combined balance sheet as of January 3, 2021. Of the $638 million estimated stock-based compensation expense reflected as operating expense, $108 million is recorded to research and development expense and $530 million is recorded to selling, general and administrative expense. The preparation of valuation studies to determine the appropriate fair value of the share-based awards have not yet been completed and the amounts reflected could change materially once the final valuation is determined.

K. To reflect the Scenario 2 issuance of Illumina Common Stock for the Alternative Consideration to GRAIL stockholders. The estimated fair value of $684 million of 1 million shares of Alternative Consideration issuable to GRAIL stockholders is reflected in the

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purchase price. The shares will be issued from Treasury stock at cost of $45 million, and the excess of fair value over cost of approximately $639 million is reflected in additional paid in capital.

L. To reflect the Scenario 2 issuance of Illumina Common Stock for the Alternative Consideration to GRAIL holders of vested GRAIL Equity Awards. The estimated fair value of $140 million of 0.3 million shares of Alternative Consideration issuable to holders of vested GRAIL Equity Awards is reflected as operating expense in the unaudited pro forma condensed combined statement of operations for the year ended January 3, 2021 and as a reduction to Retained earnings (accumulated deficit) in the unaudited pro forma condensed combined balance sheet as of January 3, 2021. The shares will be issued from Treasury stock at cost of $14 million, and the excess of fair value over cost of approximately $126 million is reflected in additional paid in capital. Of the $140 million estimated stock-based compensation expense reflected in operating expense, $24 million is recorded to research and development expense and $116 million is recorded to selling, general and administrative expense.

M. To reflect the assumption that the existing $1 billion bridge term loan facility will be replaced by $1 billion of debt, rather than issuance of equity, to fund a portion of the Cash Consideration and related Transaction costs. The $992 million is net of estimated amortizable financing-related Transaction fees of $8 million.

N. To reflect the recognition of $7 million in unamortized bridge term loan fees. These costs will not affect the statement of income beyond twelve months after the acquisition date.

O. To eliminate intercompany revenues and expenses between Illumina and GRAIL.

P. To record the amortization expense of $109 million for the year ended January 3, 2021 for the intangible assets acquired as part of the Mergers. The acquired intangible assets have been amortized using a weighted-average estimated useful life of approximately 20 years. Amortization expense of $106 million for the developed technology intangible asset is recognized as research and development expense, as there is no related revenue in the statements of operations for the year ended January 3, 2021, based on an estimated useful life of 20 years. Amortization expense of $3 million of the tradename is recognized as selling, general and administrative expense based on an estimated useful life of 10 years. The amortization of the intangible assets is based on a straight-line amortization method as this represents management’s best estimate of the pattern of utilization for the intangible assets. Illumina is still in process of evaluating the fair value of the intangible assets, and any resulting change in the fair value or estimated useful lives would have a direct impact to amortization expense.

Q. To reflect the Scenario 2 estimated share-based compensation expense of $1 million to research and development expense and $7 million to selling, general and administrative expense for the year ended January 3, 2021 related to converted awards issued at the Non-CVR Consideration Award Ratio to continuing employees as part of the Mergers for the services to be provided over the post-combination service period. The post-combination service period is expected to occur within the first twelve months after the Closing Date. The preparation of valuation studies to determine the appropriate fair value and allocation of the share-based awards have not yet been completed and any resulting change in the fair value would have a direct impact to share-based compensation expense.

R. To eliminate a $35 million continuation payment made to GRAIL in December 2020 in accordance with terms of the Merger Agreement.

S. To reflect the Scenario 2 issuance of 1 million shares of Illumina Common Stock for the Alternative Consideration to GRAIL stockholders and holders of vested GRAIL Equity Awards.

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T. To reflect interest expense, which consists of (i) interest expense ($15 million for the year ended January 3, 2021) for the $1 billion expected debt financing using a weighted average interest rate of 1.53% and (ii) amortization of financing costs ($2 million for the year ended January 3, 2021). A one-eighth percent change in the interest rate would result in an increase or a decrease in the pro forma interest expense by $1 million for the year ended January 3, 2021.

U. To reflect the related income tax effect of the other transaction accounting adjustments related to the financing activities.

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