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As filed with the Securities and Exchange Commission on June 7, 2019.

Registration No. 333-231703

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 1 TO

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

PERSONALIS, INC.

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   8071   27-5411038

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

Personalis, Inc.

1330 O’Brien Drive

Menlo Park, CA 94025

(650) 752-1300

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

John West

President and Chief Executive Officer

Personalis, Inc.

1330 O’Brien Drive

Menlo Park, CA 94025

(650) 752-1300

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

James C. Kitch

Michael Tenta

Peter N. Mandel

Cooley LLP

3175 Hanover Street

Palo Alto, CA 94304

(650) 843-5000

 

Alan F. Denenberg

Stephen Salmon

Davis Polk & Wardwell LLP

1600 El Camino Road

Menlo Park, CA 94025

(650) 752-2000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement is declared effective.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ☐

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐

  

Accelerated filer

 

Non-accelerated filer ☒

  

Smaller reporting company

 

  

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 7(a)(2)(B) of the Securities Act. ☒

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of
Securities To Be Registered
  Amount to be
Registered(1)
  Proposed Maximum
Aggregate Offering
Price Per Share(2)
  Proposed Maximum
Aggregate Offering
Price(2)
  Amount of
Registration Fee(3)

Common Stock, $0.0001 par value per share

  7,666,667   $16.00   $122,666,672   $14,867.20

 

 

(1)

Includes 1,000,000 shares of common stock that the underwriters have the option to purchase.

(2)

Estimated solely for purposes of calculating the amount of the registration fee pursuant to Rule 457(a) under the Securities Act.

(3)

The Registrant previously paid a registration fee of $13,938 in connection with the initial filing of this Registration Statement

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

PRELIMINARY PROSPECTUS (Subject to Completion)

Issued June 7, 2019

6,666,667 Shares

 

 

LOGO

COMMON STOCK

 

 

Personalis, Inc. is offering 6,666,667 shares of its common stock. This is our initial public offering and no public market currently exists for shares of our common stock. We anticipate that the initial public offering price will be between $14.00 and $16.00 per share.

We have applied to list our common stock on The Nasdaq Global Market under the symbol “PSNL.”

 

 

We are an “emerging growth company” as defined under the U.S. federal securities laws and, as such, have elected to comply with certain reduced public company reporting requirements.

 

 

Investing in our common stock involves risks. See the section titled “Risk Factors” beginning on page 13 to read about factors you should consider before buying shares of our common stock.

 

 

PRICE $            A SHARE

 

 

 

       Price to
Public
     Underwriting
Discounts
and
Commissions(1)
     Proceeds to
Personalis

Per Share

     $               $               $         

Total

     $                          $                          $                    

 

(1)

See the section titled “Underwriters” for a description of the compensation payable to the underwriters.

At our request, the underwriters have reserved up to 333,333 shares of common stock, or 5% of the shares offered by this prospectus, for sale at the initial public offering price in a directed share program, to our non-employee directors. See the section titled “Underwriters—Directed Share Program.”

We have granted the underwriters the right to purchase up to 1,000,000 additional shares of common stock to cover over-allotments.

The Securities and Exchange Commission and state securities regulators have not approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares of common stock to purchasers on                     , 2019.

 

 

 

MORGAN STANLEY      BofA MERRILL LYNCH   COWEN
     OPPENHEIMER & CO.  

                    , 2019.


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Through and including                     , 2019 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

 

We have not authorized anyone to provide you with any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock. Our business, financial condition, results of operations, and future growth prospects may have changed since that date.

For investors outside the United States: Neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside of the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of our common stock and the distribution of this prospectus outside of the United States.

 

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PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, including the sections titled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and the related notes included elsewhere in this prospectus, before making an investment decision. Our fiscal year ends on December 31. Unless the context otherwise requires, all references in this prospectus to “we,” “us,” “our,” “our company,” and “Personalis” refer to Personalis, Inc.

PERSONALIS, INC.

Overview

We are a growing cancer genomics company transforming the development of next-generation therapies by providing more comprehensive molecular data about each patient’s cancer and immune response. We designed our NeXT Platform to adapt to the complex and evolving understanding of cancer, providing our biopharmaceutical customers with information on all of the approximately 20,000 human genes, together with the immune system, in contrast to many cancer panels that cover roughly 50 to 500 genes. We are also developing a complementary liquid biopsy assay that analyzes all human genes versus the more narrowly focused liquid biopsy assays that are currently available. By combining technological innovation, operational scale, and regulatory differentiation, our NeXT Platform is designed to help our customers obtain new insights into the mechanisms of response and resistance to therapy as well as new potential therapeutic targets. Our platform enhances the ability of biopharmaceutical companies to unlock the potential of conducting translational research in the clinic rather than with pre-clinical animal models or cancer cell lines. We are also planning to release a diagnostic based on our NeXT Platform that we envision being used initially by biopharmaceutical customers and clinical collaborators. Since inception, we have provided our services to more than 45 biopharmaceutical customers, including several of the largest pharmaceutical companies in the world.

In the past decade, the biopharmaceutical community has achieved major advances in the treatment of cancer, including approval of therapies capable of targeting specific genetic drivers of cancer and novel immunotherapies that empower the immune system to attack cancer cells. Despite these advances, the substantial majority of currently available cancer therapies have significant limitations, including efficacy only in certain subsets of patients, limited long-term survival rates, and significant toxicities. Moreover, the current research and development paradigm in oncology is beset by significant inefficiencies and substantial costs, with the average cost per patient in clinical trials reaching approximately $60,000. While tumor molecular profiling technologies have enhanced research and development efforts, most current tumor biopsy and liquid biopsy tests analyze a relatively narrow set of roughly 50 to 500 tumor genes, missing key genes and immune mechanisms underlying cancer therapy. With the lack of a comprehensive profiling solution, biopharmaceutical companies often attempt to use a disparate array of tests to compensate, resulting in a fragmented view of the tumor biology, insufficient tumor sample, logistical complexities, and increased costs. The resulting data heterogeneity makes it difficult to mine for new biological insights across cohorts of patients in clinical trials. These piecemeal approaches to tumor molecular profiling often result in solutions that are difficult to use at scale, especially in a clinical or therapeutic setting where simplicity, cost, turnaround time, and validation are important.

Our platform helps biopharmaceutical companies seeking to develop more efficacious therapies by comprehensively interrogating a patient’s tumor and immune cells in detail, both to discover tumor vulnerabilities and elucidate potential therapeutic alternatives. To meet the demands of our customers, we built our NeXT Platform to be cost-effective and scalable with rapid turnaround times for tissue sample data and



 

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analytics. NeXT represents the next step of our existing ACE platform, allowing customers to move up the value chain by gaining more information from a single sample. We believe that our platform has the potential to enable a research, development, and treatment paradigm that is dynamic and adaptive to the evolving genomic and immune system landscape of patients’ tumors over time. We believe our technology will drive this evolving paradigm, which will enable our customers to develop safer and more efficacious therapeutics (see Figure 1). As the clinical utility of our platform increases, we expect to grow our diagnostic capabilities, including the ability to guide therapy based on a patient’s changing tumor and immune system, supporting the commercialization of therapeutics developed by our biopharmaceutical customers.

Figure 1. Personalis NeXT Platform addresses the increasingly complex understanding of cancer.

 

 

LOGO

Figure 1. Personalis NeXT Platform Addresses Increasingly Complex Understanding of Cancer. 1940s 1990s 2010s Future Chemotherapy Targeted Therapy Immunotherapy & Personalized Therapy Future of Cancer Therapy Increasing Therapeutic & Biological Complexity Single targets, biomarkers Established mechanisms Multiple targets, neoantigens Tumor & immune interaction Diverse escape mechanisms Complex therapeutic mechanisms Combinations Continuing evolution of therapies & science New genomics tumor & immune biomarkers, escape mechanisms, cancer biology Increasing Data Complexity ~ 50-500 genes in DNA Tumor only ~ 20,000 genes DNA & RNA Tumor and immune bio markers Tumor and normal tissue Platform Evolution Cancer Panels Personalis NeXT Platform

Personalis: The Genomics Engine for Next-Generation Cancer Therapies

Biopharmaceutical customers use our comprehensive platform across a diverse set of therapeutic approaches to cancer. We generate and analyze data from patients who participated in clinical trials, which we believe will enable these customers to develop more effective therapies.

The information we generate is important to our customers developing three major classes of next-generation therapeutics: immunotherapies, targeted therapies, and personalized cancer therapies. Based on the approximately 195,000 patients who are currently expected to enroll in the over 1,600 immunotherapy, targeted therapy, and personalized therapy clinical trials that commenced in 2018, we estimate the total addressable market for multiple time point comprehensive tissue and liquid biopsy testing in clinical trials is over $5.0 billion annually. See the section titled “Market, Industry, and Other Data” for additional information regarding the data, sources, and assumptions we used for this estimate.

 

   

Immunotherapies: Over the past decade, a number of drugs have emerged based on the discovery that the immune system plays a key role in addressing cancer. Checkpoint inhibitors, a specific type of immunotherapy, generated worldwide sales of over $16.6 billion in 2018, up from approximately



 

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$1.4 billion in 2014. The commercial success of these drugs has shown the potential of immunotherapy; however, the development of new therapies in this category has been challenged by difficulties understanding the precise interaction between cancer and the immune system. The number of clinical trials in this space involving at least one cancer immunotherapy drug has grown from 123 that started in 2012 to 1,000 that started in 2018. Since our platform provides comprehensive insights on tumor and immune biology, including in both innate and adaptive immune cells, we believe it will enable biopharmaceutical companies to better understand how therapeutics are working in patients.

 

   

Targeted Therapies: A growing category of successful cancer treatments consists of therapies that target specific genes or molecular mechanisms of cancer. These drugs are not designed to influence the immune system directly, but the success of immunotherapies has brought acknowledgment that the immune system has a significant effect on their efficacy. Many of these targeted therapies are proposed to be tested in combination with immunotherapies. These therapies have grown to represent a considerable share of the overall oncology therapeutics market today. Comprehensively understanding each patient’s genomic and immune profile is critical to understanding which of these therapies a patient may respond to. We believe that more comprehensive coverage of all of the approximately 20,000 genes positions us competitively against existing cancer panels that cover roughly 50 to 500 genes. We are positioning our company to be a leading provider of the complex information that we believe will continue to inform the development of targeted cancer therapies.

 

   

Personalized Cancer Therapies: Many biopharmaceutical companies are pursuing personalized cancer therapies, which are designed and manufactured, individually, for each patient based on genomic alterations in a given patient’s tumor. While there are many potential approaches to developing these therapies including neoantigen-based vaccines and T-cell therapies, all of them can potentially benefit from the data and analytics that our platform can generate about a patient’s tumor. Given the more than 700,000 cancer patients projected to be diagnosed with late-stage disease in the United States in 2019, we estimate that the total addressable market for our data and analytics for personalized cancer therapy could reach as much as $20 billion in the United States and as much as $40 billion worldwide. See the section titled “Market, Industry, and Other Data” for additional information regarding the data, sources, and assumptions we used for this estimate. Many of our customers have leveraged our U.S. Food and Drug Administration (the “FDA”) Device Master File as a component of their investigational new drug (“IND”) filings with the FDA. We anticipate that if drugs are approved that used our platform in the clinical trials forming the basis for approval, we may be able to derive revenue in connection with the sale of these drugs. We believe we are working with the majority of companies developing neoantigen-targeted personalized cancer therapies.

We anticipate that as the clinical utility of our platform is validated, we will have opportunities in connection with diagnostics and the commercialization of cancer therapeutics, which are significantly larger than our initial clinical-trial focused markets. Over time, we expect our biopharmaceutical customers and research collaborators to build evidence of clinical utility for our platform as a diagnostic for advanced cancer therapies. Separately, we are also acquiring samples and are building a database which will hold value for our biopharmaceutical customers and may ultimately allow us to discover new mechanisms of cancer treatment.

The NeXT Platform

Our NeXT Platform is designed to provide comprehensive analysis of both a tumor and its immune microenvironment from a single limited tissue sample. Our platform covers the deoxyribonucleic acid (“DNA”) sequence of all of the approximately 20,000 human genes. We also report on the entire transcriptome of a tumor, which encompasses ribonucleic acid (“RNA”) expression across the approximately 20,000 human genes, allowing us to more accurately determine which of the many genomic mutations might actually be driving tumor progression. Furthermore, our platform analyzes elements of the immune cells that have infiltrated a tumor both from the adaptive immune system and the innate immune system.



 

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Given the practical challenges in obtaining high-quality tumor samples via biopsy, we have developed our platform to work with a limited tumor tissue sample. Biopharmaceutical companies face significant challenges in attempting to divide samples to ship to multiple service providers to perform different tests. If a biopharmaceutical company is successful in acquiring results from multiple service providers, it is challenging to compare the results across multiple data platforms from multiple service providers. Our platform is composed of multiple proprietary technologies, many of which we have developed from the ground up. The breadth of the assays that we have integrated into our platform, our proprietary sample preparation process, and the comprehensiveness of our platform allow us to maximize the utility of often limited tumor tissue samples that our customers have from their clinical trials.

We have also shown that our technology can analyze cell-free DNA (“cfDNA”) obtained from blood plasma, also known as a liquid biopsy. As with a tissue biopsy, we plan to analyze all of the approximately 20,000 human genes in each plasma sample, in contrast to currently marketed liquid biopsy panels. We expect this cfDNA to be obtained by a blood draw concurrently with a tissue sample. Together, the two samples can be used to provide a more comprehensive initial characterization of the tumor. Additionally, we expect to monitor changes in tumor genetics that arise in response to therapy through serial measurements using cfDNA samples collected across multiple time points. In 2020, we plan to launch our first liquid biopsy assay designed to analyze all human genes so as to detect potential neoantigens and tumor escape mechanisms that arise under therapeutic pressure. Although we believe our cfDNA test will offer new insights, we believe it will be most useful for our biopharmaceutical customers alongside our primary tumor biopsy product, given that a tumor biopsy is required to analyze gene expression and elucidate tumor-infiltrating lymphocytes, which are critical to understanding cancer’s interaction with the immune system.

Robust Operational Infrastructure to Scale with Our Customers

We have invested significant resources to develop an operational infrastructure that allows us to easily customize our services for each of our customers and scale rapidly to meet their potential research and commercial demands. Our NeXT Platform is complemented by our enterprise-grade software and bespoke information management systems that we tailor to meet our customers’ unique needs and integrate with their workflows. Moreover, our infrastructure provides customers with visibility and control over processes, ensures consistency across all components used for the duration of each clinical trial, is traceable for compliance purposes, and allows us to scale while maintaining rapid turnaround times.

We designed our proprietary informatics system, the Symphony Enterprise Informatics System (“Symphony”), as a flexible and scalable enterprise-grade system used to manage the unique complexities and challenges of our genomics laboratory. Symphony integrates laboratory information management systems and bioinformatics systems to connect laboratory operations with downstream data analysis. Symphony orchestrates all operational activities from our laboratory starting with sample receipt to the reporting of results of the genomic profiling and data delivery. We also use machine learning and artificial intelligence approaches to generate substantial performance advantages for our algorithms, such as neoantigen binding prediction.

We are sequencing and analyzing up to 100 trillion bases of DNA per week in our facility. We believe this capacity is already larger than most cancer genomics companies and we are building the automation and other infrastructure to scale further as demand increases and in support of the planned 2020 launch of our NeXT liquid biopsy assay.

Since 2012, we have been contracted to provide DNA sequencing and data analysis services to the U.S. Department of Veterans Affairs’ (the “VA”) Million Veteran Program (the “VA MVP”). The VA MVP began collecting samples in 2011 and is a landmark research effort aimed at better understanding how genetic variations affect health. Up to a million veterans are expected to enroll in the VA MVP study by 2021. With approximately



 

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750,000 enrollees to date, the VA MVP exceeds the enrollment numbers of any single VA study or research program in the past, and is in fact one of the largest research cohorts of its kind. In September 2017, we entered into a one-year contract with three one-year renewal option periods with the VA for the VA MVP, and received orders under this contract in September 2017 and 2018. This relationship with the VA MVP has enabled us to innovate, scale our operational infrastructure, and achieve greater efficiencies in our lab. It has also supported our development of industry-leading, large-scale cancer genomic testing. The substantial experience that we have and expect to continue to develop in whole genome sequencing also optimally positions us for what we anticipate to be the longer-term strategic direction of the cancer genomics industry, which may include whole genome sequencing of tumors.

We believe our platform is well positioned to scale rapidly and substantially as the field of personalized cancer therapies matures. We believe that our platform could be essential to the composition and manufacture of any personalized cancer therapy developed using our platform. Furthermore, we expect that patients would be tested at multiple time points during the course of treatment: first to design a therapy according to an initial genomic profile generated from a tissue and/or liquid biopsy, and then as follow-up testing via liquid biopsy to detect any changes that would require therapy modifications after initial therapeutic interventions. If a therapy that uses our NeXT Platform achieves regulatory approval, we believe that our commercial opportunity may increase substantially.

Personalis is Valuable to Biopharmaceutical Companies

We believe that our platform is valuable to our customers because:

 

   

Our tumor and immune molecular profiling capabilities provide an unprecedented breadth of data from a single limited tumor sample. We provide information on all of the approximately 20,000 human genes, as well as gene expression, the immune system, and other elements of cancer biology, in contrast to other currently marketed panels that cover a limited range of roughly 50 to 500 genes and do not focus on immune cells.

 

   

Our platform enhances the opportunity to conduct translational research by analyzing tumor tissues from patients in clinical trials, rather than animal models or in vitro cancer cell lines, which have historically limited cancer research. While conventional pre-clinical model systems, such as animal models and cancer cell lines, have been instrumental in early-stage cancer research and drug development, translation of results to the clinic has been limited and remains a significant barrier to progress, in part because these models do not sufficiently reflect the complexity of human cancer and the human immune system. Over recent years, tools used to study tissue from patients have improved and the utilization of tissue from trials has increased. We believe our platform represents the next step in this transition by further enabling biopharmaceutical companies to address the historical limitations of analyzing patient tissue comprehensively.

 

   

The information we provide to personalized cancer therapy companies can be used to design therapeutics. Many biopharmaceutical companies are pursuing personalized cancer therapies, which are designed and manufactured, individually, for each patient based on genomic alterations in a given patient’s tumor. While there are many potential approaches to developing these therapies including neoantigen-based vaccines and T-cells therapies, all of them can potentially benefit from the data and analytics that our platform can generate about a patient’s tumor.

 

   

Our enterprise-grade operational infrastructure is scalable, enables rapid turnaround times, and is tailored to meet the unique workflow needs of our customers. We have invested significant resources to develop an operational infrastructure that allows us to easily customize our services for each of our customers and scale rapidly to meet their potential research and commercial demands.



 

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We are developing a complementary liquid biopsy test, which also offers broad 20,000-gene coverage versus more narrowly focused liquid biopsy tests that are currently available. While tumor biopsies are necessary to provide tumor immune microenvironment and gene expression information that current liquid biopsy panels do not provide, we believe a comprehensive liquid biopsy test used in concert with our tissue test can provide complementary information across multiple time points.

Our Strategy

Our mission is to transform the development of next generation cancer therapies by providing more comprehensive molecular data about each patient’s tumor. To achieve this mission, our strategy is to:

 

   

Drive adoption of our platform by establishing and expanding relationships with leading developers of oncology therapeutics;

 

   

Invest in new product innovations and enhancements to maintain our leading position;

 

   

Continue to build a body of evidence demonstrating the utility of comprehensive genomic data;

 

   

Continue to grow our relationship with the VA MVP to innovate and scale our operational infrastructure;

 

   

Leverage a growing body of evidence from our platform to develop a diagnostic; and

 

   

Build out a comprehensive tumor-genomics database.

Our Team

We have assembled a multidisciplinary team of experienced industry leaders to drive continuous innovation. Scientific and operational excellence is a guiding principle for our employees. We have invested not only in the technology to provide information of sufficient quality for clinical use, but also in the people to continuously innovate for the industry’s growing and changing demands.

Our President and Chief Executive Officer, John West, co-founded our company in 2011 in conjunction with four Stanford professors, Euan Ashley, M.D., Ph.D., Atul Butte, M.D., Ph.D., Russ Altman, M.D., Ph.D., and Michael Snyder, Ph.D. More broadly, our executive officers and management team members have had previous experience at a variety of genomics, pharmaceuticals, biotechnology, diagnostics, data analytics, service, enterprise software, and technology companies including Agilent Technologies, Inc., Applied Biosystems Inc., ARMO Biosciences, Inc., Illumina, Inc., Informatica LLC, Ingenuity Systems, Inc., Lumentum Holdings Inc., Merck & Co., Inc., Molecular Dynamics, Inc., Natera, Inc., Novartis Pharmaceuticals Corp., Pacific Biosciences of California, Inc., RainDance Technologies, Inc., and Solexa, Ltd.

Financial Highlights

Our revenues have grown rapidly as our penetration of clinical trials in advanced oncology therapeutics has expanded, consistent with our reputation as a leader in the field. We generated revenues of $9.4 million, $37.8 million, and $14.1 million for the years ended December 31, 2017 and 2018 and the three months ended March 31, 2019, respectively. We also incurred net losses of $23.6 million, $19.9 million, and $5.7 million for the years ended December 31, 2017 and 2018 and the three months ended March 31, 2019, respectively.

As of March 31, 2019, we had $33.2 million of cash and cash equivalents, an increase of $11.4 million from March 31, 2018. Our revenues are primarily generated through sales of our services to biopharmaceutical companies and the VA MVP. Unlike diagnostic or therapeutic companies, we have not sought reimbursement through traditional healthcare payors. We have raised $89.6 million in preferred stock equity financing to date.



 

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Risk Factors Summary

Investing in our common stock involves numerous risks, including the risks described in the section titled “Risk Factors” and elsewhere in this prospectus. You should carefully consider these risks before making an investment. The following are some of these risks, any of which could have an adverse effect on our business financial condition, operating results, or prospects.

 

   

We have a history of losses, and as our costs increase, we expect to incur significant losses for the foreseeable future and may not be able to generate sufficient revenue to achieve or sustain profitability.

 

   

If we are unable to increase sales of our current services or successfully develop and commercialize other services, our revenues will be insufficient for us to achieve profitability.

 

   

Certain of our customers prepay us for a portion of the services that they expect to order from us in the future, and we may be required to refund some or all of those prepayments if a customer cancels its contract with us or reduces the level of services that it expects to receive.

 

   

If we are unable to execute our sales and marketing strategy for our services and are unable to gain sufficient acceptance in the market, we may be unable to generate sufficient revenue to sustain our business.

 

   

If we cannot compete successfully with our competitors, we may be unable to increase or sustain our revenues or achieve and sustain profitability.

 

   

Our inability to raise additional capital on acceptable terms in the future may limit our ability to continue to operate our business and further expand our operations.

 

   

We will need to invest in our infrastructure in advance of increased demand for our services, and our failure to accurately forecast demand would have a negative impact on our business and our ability to achieve and sustain profitability.

 

   

We have substantial customer concentration, with a limited number of customers accounting for a substantial portion of our 2018 revenues and accounts receivable.

 

   

Our tests may be subject to regulatory action if regulatory agencies determine that our tests do not appropriately comply with statutory and regulatory requirements enforced by the FDA and/or CLIA requirements for quality laboratory testing.

 

   

Litigation or other proceedings or third-party claims of intellectual property infringement, misappropriation or other violations may require us to spend significant time and money, and could in the future prevent us from selling our tests or impact our stock price, any of which could have a material adverse effect.

 

   

We have identified a material weakness in our internal control over financial reporting and may identify additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls, which may result in material misstatements of our financial statements or cause us to fail to meet our periodic reporting obligations.

 

   

Insiders will exercise significant control over our company and will be able to influence corporate matters.

Corporate Information

We were incorporated under the laws of the state of Delaware in February 2011 under the name Personalis, Inc. Our principal executive offices are located at 1330 O’Brien Drive, Menlo Park, California 94025. Our telephone number is (650) 752-1300. Our website address is https://www.personalis.com. Information contained on, or that can be accessed through, our website is not incorporated by reference into this prospectus, and you should not consider information on our website to be part of this prospectus.



 

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Personalis, the Personalis logo, and our other registered or common law trade names, trademarks, or service marks appearing in this prospectus are the property of Personalis, Inc. Trade names, trademarks, and service marks of other companies appearing in this prospectus are the property of their respective owners.

Implications of Being an Emerging Growth Company

As a company with less than $1.07 billion in revenues during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”), enacted in April 2012. An emerging growth company may take advantage of reduced reporting requirements that are otherwise applicable to public companies. These provisions include, but are not limited to:

 

   

not being required to comply for a certain period of time with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended;

 

   

reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements, and registration statements; and

 

   

exemptions from the requirements of holding a stockholder advisory vote on executive compensation and any golden parachute payments not previously approved.

We may take advantage of these provisions until the last day of our fiscal year following the fifth anniversary of the date of the first sale of our common stock in this offering. However, if certain events occur prior to the end of such five-year period, including if (i) we become a “large accelerated filer,” with at least $700 million of equity securities held by non-affiliates; (ii) our annual gross revenues exceed $1.07 billion; or (iii) we issue more than $1.0 billion of non-convertible debt in any three-year period, we will cease to be an emerging growth company prior to the end of such five-year period.

We have elected to take advantage of certain of the reduced disclosure obligations in the registration statement of which this prospectus is a part and may elect to take advantage of other reduced reporting requirements in future filings. As a result, the information that we provide to our stockholders may be different than you might receive from other public reporting companies in which you hold equity interests.

In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This provision allows an emerging growth company to delay the adoption of some accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this exemption and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.



 

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THE OFFERING

 

Common stock offered by us

  

6,666,667 shares

Common stock to be outstanding after this offering

  

28,496,368 shares

Over-allotment option to purchase additional shares

  

1,000,000 shares

Use of proceeds

  

We estimate that the net proceeds from the sale of our common stock in this offering will be approximately $89.8 million (or approximately $103.8 million if the underwriters exercise their over-allotment option in full), based on the assumed initial public offering price of $15.00 per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

The principal purposes of this offering are to increase our capitalization and financial flexibility and create a public market for our common stock. We currently intend to use the net proceeds we receive from this offering for expanded research and development, infrastructure expansion, facilities expansion, headcount growth, sales and marketing expenditures, public company costs, other capital expenditures, and working capital. See the section titled “Use of Proceeds” for additional information.

Risk factors

  

See the section titled “Risk Factors” for additional information.

Directed share program

  

At our request, the underwriters have reserved up to 333,333 shares of common stock, or up to 5% of the shares offered by this prospectus, for sale at the initial public offering price through a directed share program to our non-employee directors. The sales will be made at our direction by Morgan Stanley & Co. LLC and its affiliates through a directed share program. The number of shares of our common stock available for sale to the general public in this offering will be reduced to the extent that such persons purchase such reserved shares. Any reserved shares not so purchased will be offered by the underwriters to the general public on the same terms as the other shares of common stock offered by this prospectus. Any of our non-employee directors that participate in this directed share program will be subject to lockup and market standoff restrictions with the underwriters and with us with respect to any shares purchased through the directed share program.

 

For additional information, see the section titled “Underwriters—Directed Share Program.”

Proposed trading symbol on The Nasdaq Global Market

  

“PSNL”



 

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The number of shares of our common stock that will be outstanding after this offering is based on 21,829,701 shares of our common stock (including shares of our redeemable convertible preferred stock on an as-converted basis, and assuming the exercise of a warrant to purchase 188,643 shares of our common stock) outstanding as of March 31, 2019, and excludes:

 

   

4,381,884 shares of our common stock issuable upon the exercise of options to purchase shares of our common stock granted under our 2011 Equity Incentive Plan (the “2011 Plan”), and outstanding as of March 31, 2019, with a weighted-average exercise price of $3.62 per share;

 

   

363,440 shares of our common stock issuable upon the exercise of options to purchase shares of our common stock granted under our 2011 Plan after March 31, 2019, with an exercise price of $13.20 per share;

 

   

84,585 shares of our redeemable convertible preferred stock issuable upon the exercise of warrants to purchase shares of our redeemable convertible preferred stock outstanding as of March 31, 2019, with a weighted-average exercise price of $7.13 per share;

 

   

65,502 shares of our common stock issuable upon the exercise of a warrant to purchase shares of our common stock outstanding as of March 31, 2019, with an exercise price of $9.16 per share;

 

   

7,440,524 shares of our common stock reserved for future issuance under our 2019 Equity Incentive Plan (the “2019 Plan”), (including up to 5,440,524 shares of our common stock comprised of (i) the shares reserved and remaining available for issuance under our 2011 Plan that will be added to our 2019 Plan reserve upon its effectiveness plus (ii) the number of shares subject to stock options or other stock awards granted under our 2011 Plan that would have otherwise returned to our 2011 Plan, which will be added as they become available (e.g., due to forfeiture of the underlying 2011 Plan award)) which includes an annual evergreen increase and will become effective in connection with this offering; and

 

   

250,000 shares of our common stock reserved for future issuance under our 2019 Employee Stock Purchase Plan (the “ESPP”), which includes an annual evergreen increase and will become effective in connection with this offering.

Unless otherwise indicated, the information in this prospectus assumes:

 

   

an initial public offering price of $15.00 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus;

 

   

the automatic conversion of all outstanding shares of our redeemable convertible preferred stock into 18,474,742 shares of our common stock immediately prior to the closing of this offering;

 

   

a four-for-one reverse stock split of our common stock and redeemable convertible preferred stock, which was effected on June 4, 2019 (all share and per share amounts in this prospectus have been presented in a retrospective basis to reflect the reverse stock split);

 

   

no exercise of the outstanding options described above;

 

   

the cash exercise of an outstanding warrant to purchase 188,643 shares of our common stock;

 

   

no exercise of the outstanding warrants to purchase shares of our redeemable convertible preferred stock described above and the automatic conversion of such warrants into warrants exercisable for 84,585 shares of our common stock;

 

   

no exercise of an outstanding warrant to purchase 65,502 shares of our common stock described above;

 

   

no exercise of the underwriters’ option to purchase up to an additional 1,000,000 shares of common stock to cover over-allotments; and

 

   

the filing and effectiveness of our amended and restated certificate of incorporation and the adoption of our amended and restated bylaws, each of which will occur prior to the closing of this offering.



 

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SUMMARY CONSOLIDATED FINANCIAL DATA

The summary consolidated statements of operations data for the years ended December 31, 2017 and 2018 has been derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary consolidated statements of operations and comprehensive loss data for the three months ended March 31, 2018 and 2019 and the summary consolidated balance sheet data as of March 31, 2019 are derived from our unaudited interim condensed consolidated financial statements included elsewhere in this prospectus. We have prepared the unaudited interim condensed consolidated financial statements on the same basis as the audited financial statements and have included, in our opinion, all adjustments, consisting only of normal recurring adjustments that we consider necessary for a fair statement of the financial information set forth in those statements. You should read the consolidated financial data set forth below in conjunction with our consolidated financial statements and the accompanying notes and the information in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected for any other period in the future and our interim results for the three months ended March 31, 2019 are not necessarily indicative of results to be expected for the full year ending December 31, 2019, or any other period.

 

     Year Ended December 31,     Three Months Ended
March 31,
 
     2017     2018     2018     2019  
                 (unaudited)  
     (in thousands, except share and per share data)  

Consolidated Statements of Operations Data:

        

Revenues

   $ 9,393     $ 37,774     $ 4,164     $ 14,075  

Costs and expenses

        

Costs of revenues(1)

     11,736       25,969       4,065       10,091  

Research and development(1)

     9,919       14,304       2,949       5,245  

Selling, general, and administrative(1)

     9,901       11,271       2,313       4,170  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     31,556       51,544       9,327       19,506  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (22,163     (13,770     (5,163     (5,431

Interest income

     100       293       61       84  

Interest expense

     (1,303     (1,894     (622     (184

Loss on debt extinguishment

           (4,658            

Other (expense) income, net

     (227     150       351       (152
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (23,593     (19,879     (5,373     (5,683
  

 

 

   

 

 

   

 

 

   

 

 

 

Provision for income taxes

     (5     (7     (2     (2
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (23,598   $ (19,886   $ (5,375   $ (5,685
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share, basic and diluted(2)

   $ (7.78   $ (6.49   $ (1.76   $ (1.84
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares outstanding, basic and diluted(2)

     3,031,636       3,063,157       3,051,581       3,091,342  
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share, basic and diluted (unaudited)(2)

     $ (0.95     $ (0.26
    

 

 

     

 

 

 

Pro forma weighted-average shares outstanding, basic and diluted (unaudited)(2)

       20,483,543         21,754,727  
    

 

 

     

 

 

 


 

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(1)

Includes stock-based compensation as follows:

 

     Year Ended December 31,      Three Months Ended March 31,  
           2017                  2018                  2018                  2019        
                   (unaudited)  
     (in thousands)  

Costs of revenues

   $ 74      $ 177      $ 24      $ 85  

Research and development

     225        429        64        164  

Selling, general, and administrative

     454        711        81        360  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 753      $ 1,317      $ 169      $ 609  
  

 

 

    

 

 

    

 

 

    

 

 

 
(2)

See the consolidated statements of operations and Note 15 to our consolidated financial statements included elsewhere in this prospectus for an explanation of the method used to compute the historical and pro forma net loss per share and the number of shares used in the computation of the per share amounts.

 

     As of March 31, 2019  
     Actual     Pro Forma(1)     Pro Forma
as Adjusted(2)(3)
 
     (unaudited)  
     (in thousands)  

Consolidated Balance Sheet Data:

  

Cash and cash equivalents

   $ 33,237     $ 33,245     $ 123,045  

Working capital(4)

     (15,348     (15,340     74,460  

Total assets

     57,647       57,655       147,455  

Redeemable convertible preferred stock warrant liability

     817              

Additional paid-in capital

     10,666       101,784       191,583  

Accumulated deficit

     (121,190     (122,080     (122,080

Total stockholders’ equity (deficit)

     (110,523     (20,294     69,506  

 

(1)

The pro forma consolidated balance sheet data gives effect to (i) the automatic conversion of all of our outstanding shares of redeemable convertible preferred stock as of March 31, 2019 into 18,474,742 shares of our common stock immediately prior to the closing of this offering, (ii) the assumed cash exercise of a warrant to purchase 188,643 shares of our common stock, (iii) the automatic conversion of two warrants to purchase an aggregate of 84,585 shares of our redeemable convertible preferred stock, outstanding as of March 31, 2019, into warrants to purchase an equivalent number of shares of our common stock, and the related reclassification of redeemable convertible preferred stock warrant liability to stockholders’ equity, (iv) stock-based compensation expense of $0.9 million associated with outstanding stock options subject to a performance condition for which the service-based vesting condition was satisfied as of March 31, 2019 and which we will recognize in connection with this offering, and (v) the filing and effectiveness of our amended and restated certificate of incorporation that will be in effect immediately prior to the closing of this offering. For additional information, see Note 1 to our consolidated financial statements included elsewhere in this prospectus.

(2)

The pro forma as adjusted consolidated balance sheet data gives effect to (i) the pro forma items described in footnote (1) above and (ii) the issuance and sale by us of 6,666,667 shares of our common stock in this offering at the assumed initial public offering price of $15.00 per share, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us and the use of proceeds to satisfy the withholding tax obligations described in the footnote above.

(3)

The pro forma as adjusted consolidated balance sheet data is illustrative only and will change based on the actual initial public offering price and other terms of this offering determined at pricing. Each $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share would increase (decrease) each of our pro forma as adjusted cash and cash equivalents, working capital, total assets, additional paid-in capital and total stockholders’ deficit by $6.2 million, assuming the number of shares of common stock offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of 1.0 million shares in the number of shares of common stock offered by us would increase (decrease) each of our pro forma as adjusted cash and cash equivalents, working capital, total assets, additional paid-in capital, and total stockholders’ deficit by approximately $14.0 million, assuming the assumed initial public offering price of $15.00 per share remains the same, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

(4)

Working capital is defined as total current assets less total current liabilities. See our consolidated financial statements and the related notes included elsewhere in this prospectus for further details regarding our current assets and current liabilities.



 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should consider and read carefully all of the risks and uncertainties described below, as well as other information included in this prospectus, including our consolidated financial statements and related notes appearing at the end of this prospectus, before making an investment decision. The occurrence of any of the following risks or additional risks and uncertainties not presently known to us or that we currently believe to be immaterial could materially and adversely affect our business, financial condition, or results of operations. In such case, the trading price of our common stock could decline, and you may lose all or part of your original investment. This prospectus also contains forward-looking statements and estimates that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of specific factors, including the risks and uncertainties described below.

Risks Related to Our Business and Strategy

We have a history of losses, and as our costs increase, we expect to incur significant losses for the foreseeable future and may not be able to generate sufficient revenue to achieve or sustain profitability.

We have incurred net losses since our inception. For the years ended December 31, 2017 and 2018 and the three months ended March 31, 2019, we had net losses of $23.6 million, $19.9 million, and $5.7 million, respectively. As of March 31, 2019, we had an accumulated deficit of $121.2 million. To date, we have not generated sufficient revenue to achieve profitability, and we may never achieve or sustain profitability. In addition, we expect to continue to incur net losses for the foreseeable future, and we expect our accumulated deficit to continue to increase as we focus on scaling our business and operations. Our efforts to sustain and grow our business may be more costly than we expect, and we may not be able to increase our revenue sufficiently to offset our higher operating expenses. Our prior losses and expected future losses have had and will continue to have an adverse effect on our stockholders’ equity and working capital. Our failure to achieve and sustain profitability in the future would negatively affect our business, financial condition, results of operations, and cash flows, and could cause the market price of our common stock to decline.

If we are unable to increase sales of our current services or successfully develop and commercialize other services or products, our revenues will be insufficient for us to achieve profitability.

We currently derive substantially all of our revenues from sales of our services. We began offering our services through our Clinical Laboratory Improvement Amendments of 1988 (“CLIA”)-certified, College of American Pathologists (“CAP”)-accredited, and state-licensed laboratory in 2013. We are in varying stages of research and development for other services and products that we may offer. If we are unable to increase sales of our existing services or successfully develop and commercialize other services and products, we will not generate sufficient revenues to become profitable.

Certain of our customers prepay us for a portion of the services that they expect to order from us in the future and we may be required to refund some or all of those prepayments if a customer cancels its contract with us or reduces the level of services that it expects to receive.

Certain of our customers prepay us for a portion of the services that they expect to order from us before they place purchase orders and we deliver those services. In some cases, this prepayment can be substantial and may be paid months or a year or more in advance of these customers providing samples to us and before our delivery of the services to which some or all of the deposit relates. As of March 31, 2019, we had approximately $44.3 million in customer deposits, including $39.6 million from one customer. However, as of that date, we had only $33.2 million of cash and cash equivalents. We are generally not required by our contracts to retain these

 

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deposits in cash or otherwise and we have generally used these deposits to make capital expenditures and fund our operations. If a customer that has prepaid us for future services cancels its contract with us or reduces the level of services that it expects to receive, we would generally be required to repay that customer’s deposit with little or no notice. We may not have the cash or other available resources to satisfy that repayment obligation. Even if we are able to satisfy the repayment obligation from available resources (including potentially a portion of the net proceeds of this offering), we may need to seek additional sources of capital to fund our operations, which funding may not be available when needed or on acceptable terms. In either of those circumstances, our business, financial condition, results of operations, and reputation would be materially and adversely affected. Furthermore, in the future customers may elect not to prepay us for our services in which case we would have to find other sources of funding for our capital expenditures and operations, which would be costly relative to the aforementioned cost-free customer deposit funding and which may not be available when needed or on acceptable terms.

If we are unable to execute our sales and marketing strategy for our services and are unable to gain sufficient acceptance in the market, we may be unable to generate sufficient revenues to sustain our business.

We are a growing genomics company and have engaged in targeted sales and marketing activities for our services. Although we have had revenues from sales of our services since 2013, our services may never gain significant acceptance in the marketplace and therefore may never generate substantial revenues or permit us to become profitable. We will need to further establish and grow the market for our services through the expansion of our current relationships and development of new relationships with biopharmaceutical customers. Gaining acceptance in medical communities can be supported by, among other things, publications in leading peer-reviewed journals of results from studies using our services. The process of publication in leading medical journals is subject to a peer review process and peer reviewers may not consider the results of our studies sufficiently novel or worthy of publication. Failure to have our studies published in peer-reviewed journals would limit the adoption of our services.

Our ability to successfully market our services that we have developed, and may develop in the future, will depend on numerous factors, including:

 

   

our ability to demonstrate the utility and value of our services to our customers;

 

   

the success of our sales force;

 

   

whether biopharmaceutical companies accept that our services are sufficiently sensitive and specific;

 

   

our ability to convince biopharmaceutical companies of the utility of the comprehensiveness of our services and of testing patients at multiple time points;

 

   

our ability to continue to fund sales and marketing activities;

 

   

whether our services are considered superior to those of our competitors;

 

   

any negative publicity regarding our or our competitors’ services resulting from defects or errors;

 

   

our success obtaining and maintaining patent and trade secret protection for our services and technologies; and

 

   

our success enforcing and defending intellectual property rights and claims.

Failure to achieve broad market acceptance of our services would materially harm our business, financial condition, and results of operations.

If we cannot compete successfully with our competitors, we may be unable to increase or sustain our revenues or achieve and sustain profitability.

Our principal competition comes from commercial and academic organizations using established and new laboratory tests to produce information that is similar to the information that we generate for our customers.

 

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These commercial and academic organizations may not utilize our services or may not believe them to be superior to those tests that they currently use or others that are developed. Further, it may be difficult to convince our customers to use our comprehensive test rather than simpler panels provided by our competitors. For example, the information that we provide may be more challenging or require additional resources for our customers to interpret than the information provided by our competitors’ less comprehensive assays.

Some of our present and potential competitors, including Guardant Health, Inc., Foundation Medicine, Inc., which was acquired by Roche Holdings, Inc. in July 2018, Roche Molecular Systems, Inc., NanoString Technologies, Inc., Personal Genome Diagnostics, Inc., and Adaptive Biotechnologies Corporation, may have widespread brand recognition and substantially greater financial and technical resources and development, production capacities, and marketing capabilities than we do. They may be able to devote greater resources to the development, promotion, and sale of their products and services than we do or sell their products and services at prices designed to win significant levels of market share. In addition, competitors may be acquired by, receive investments from, or enter into other commercial relationships with larger, well-established, and well-financed companies. Others may develop lower-priced, less complex products and services that pharmaceutical companies could view as functionally equivalent to our current or planned future services, which could force us to lower the price of our services and impact our operating margins and our ability to achieve and maintain profitability. In addition, companies or governments that control access to genetic testing and related services through umbrella contracts or regional preferences could promote our competitors or prevent us from performing certain services. In addition, technological innovations that result in the creation of enhanced products or diagnostic tools that are more sensitive or specific than ours may enable other clinical laboratories, hospitals, physicians, or medical providers to provide specialized products or services similar to ours in a more patient-friendly, efficient, or cost-effective manner than is currently possible. If we cannot compete successfully against current or future competitors, we may be unable to ensure or increase market acceptance and sales of our current or planned future services, which could prevent us from increasing or sustaining our revenues or achieving or sustaining profitability.

We expect that biopharmaceutical companies will increasingly focus attention and resources on the targeted and personalized cancer diagnostic sector as the potential and prevalence of molecularly targeted oncology therapies approved by the U.S. Food and Drug Administration (the “FDA”) along with companion diagnostics increases. For example, the FDA has approved several such targeted oncology therapies that use companion diagnostics, including the anaplastic lymphoma kinase FISH test from Abbott Laboratories, Inc. for use with Xalkori® from Pfizer Inc., the BRAF kinase V600 mutation test from Roche Molecular Systems, Inc. for use with Zelboraf® from Daiichi-Sankyo/Genentech/Roche, and the BRAF kinase V600 mutation test from bioMerieux for use with Tafinlar® from GlaxoSmithKline. Since companion diagnostic tests are part of FDA labeling, non-FDA cleared tests, such as the ones we currently offer as part of our services, would be considered an off-label use and this may limit our access to this market segment.

Additionally, projects related to cancer diagnostics and particularly genomics have received increased government funding, both in the United States and internationally. As more information regarding cancer genomics becomes available to the public, we anticipate that more products aimed at identifying targeted treatment options will be developed and that these products may compete with our services. In addition, competitors may develop their own versions of our current or planned future services in countries where we did not apply for or receive patents and compete with us in those countries, including encouraging the use of their products or services by biopharmaceutical companies in other countries.

Our inability to raise additional capital on acceptable terms in the future may limit our ability to continue to operate our business and further expand our operations.

We expect capital expenditures and operating expenses to increase over the next several years as we continue to operate our business and expand our infrastructure, commercial operations, and research and development activities. Additionally, if we decide to grow our business by developing in vitro diagnostic tests,

 

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our capital expenditures and operating expenses would significantly increase. We may seek to raise additional capital through equity offerings, debt financings, collaborations, or licensing arrangements. Additional funding may not be available to us on acceptable terms, or at all.

The various ways we could raise additional capital carry potential risks. If we raise funds by issuing equity securities, dilution to our stockholders would result. Any equity securities issued may also provide for rights, preferences, or privileges senior to those of holders of our common stock. In addition, the issuance of additional equity securities by us, or the possibility of such issuance, may cause the market price of our common stock to decline. If we raise funds by issuing debt securities, those debt securities would have rights, preferences, and privileges senior to those of holders of our common stock. The terms of debt securities issued or borrowings pursuant to a credit agreement, if available, could impose significant restrictions on our operations. The incurrence of additional indebtedness or the issuance of certain equity securities could result in increased fixed payment obligations and could also result in restrictive covenants, such as limitations on our ability to incur additional debt or issue additional equity, limitations on our ability to acquire or license intellectual property rights, and other operating restrictions that could adversely affect our ability to conduct our business. In the event that we enter into collaborations or licensing arrangements to raise capital, we may be required to accept unfavorable terms. These agreements may require that we relinquish or license to a third party on unfavorable terms our rights to tests we otherwise would seek to develop or commercialize ourselves, or reserve certain opportunities for future potential arrangements when we might be able to achieve more favorable terms.

If we are not able to secure additional funding when needed, we may have to delay, reduce the scope of or eliminate one or more research and development programs or sales and marketing initiatives. In addition, we may have to work with a partner on one or more aspects of our tests or market development programs, which could lower the economic value of those tests or programs to us. While we believe our existing cash and cash equivalents, and the anticipated proceeds from this offering, will be sufficient to meet our anticipated cash requirements for at least the next 12 months, we cannot assure you that we will generate sufficient revenues from commercial sales to adequately fund our operating needs or achieve or sustain profitability.

We will need to invest in our infrastructure in advance of increased demand for our services, and our failure to accurately forecast demand would have a negative impact on our business and our ability to achieve and sustain profitability.

In order to execute our business model, we need to invest in scaling our infrastructure, including hiring additional personnel, expanding our internal quality assurance program, and expanding laboratory capacity. We will also need to purchase additional equipment, some of which can take several months or more to procure, setup, and validate, and increase our software and computing capacity to meet increased demand. There is no assurance that any of these increases in scale, expansion of personnel, equipment, software, and computing capacities, or process enhancements will be successfully implemented, or that we will have adequate space in our laboratory facility to accommodate such required expansion. We expect that much of this growth will be in advance of increased demand for our services. Our current and projected future expense levels are to a large extent fixed and are largely based on our current investment plans and our estimates of future test volume. As a result, if revenues do not meet our expectations we may not be able to promptly adjust or reduce our spending to levels commensurate with our revenues. If we fail to generate demand commensurate with our infrastructure growth or if we fail to scale our infrastructure sufficiently in advance of demand to successfully meet such demand, our business, prospects, financial condition, and results of operations could be adversely affected.

As we commercialize additional services or products, we may need to incorporate new equipment, implement new technology systems and laboratory processes, or hire new personnel with different qualifications. Failure to manage this growth or transition could result in turnaround time delays, higher costs, declining service and/or product quality, deteriorating customer service, and slower responses to competitive challenges. A failure in any one of these areas could make it difficult for us to meet market expectations for our services, and could damage our reputation and the prospects for our business.

 

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We have substantial customer concentration, with a limited number of customers accounting for a substantial portion of our 2018 revenues and accounts receivable.

Like other genomics profiling companies that sell to the pharmaceutical industry, we have customer concentration. We currently derive a significant portion of our revenues from the U.S. Department of Veterans Affairs (the “VA”) Million Veteran Program (the “VA MVP”), which accounted for more than 49% of our revenues in 2018, and 59% of our revenues in the three months ended March 31, 2019. Our top five customers, including the VA MVP, accounted for 82% of our revenues in 2018 and 90% of our revenues for the three months ended March 31, 2019. There are inherent risks whenever a large percentage of revenues are concentrated with a limited number of customers. It is not possible for us to predict the future level of demand for our services that will be generated by these customers. In addition, revenues from our larger customers have historically fluctuated and may continue to fluctuate based on the commencement and completion of clinical trials or other projects, the timing of which may be affected by market conditions or other facts, some of which may be outside of our control. Further, while we have long-term contractual arrangements with certain of our customers, these customers are not required to purchase a minimum number of analyses. If any of these customers suspend or terminate clinical trials, receive less funding, experience declining or delayed sales, or otherwise chose to reduce or eliminate their use of our services, we could be pressured to reduce the prices we charge for our services which would have an adverse effect on our margins and financial position, and which would likely negatively affect our revenues and results of operations. In particular, if the VA MVP terminates our services for convenience, which it is permitted to do, such termination would have a material adverse effect on our revenues, cash position, and results of operations. Further, if our largest customers were to cease using or stop payment for our services, it would have a material adverse effect on our accounts receivable, increasing our credit risk. The failure of these customers to pay their balances, or any customer to pay future outstanding balances, would result in an operating expense and reduce our cash flows.

We currently derive a substantial portion of our revenues from DNA sequencing and data analysis services that we provide to our largest customer, the VA MVP. If the VA MVP’s demand for and/or funding for our DNA sequencing and data analysis services is substantially reduced, our business, financial condition, operating results, and cash flows would be materially harmed.

We derive a substantial portion of our current and expected future revenues from sales of our DNA sequencing and data analysis services to the VA MVP. In September 2017, we entered into a one-year contract with three one-year option renewal periods with the VA for the VA MVP, pursuant to which we received orders from the VA MVP in September 2017 and 2018.

The VA MVP’s orders for DNA sequencing and data analysis services are subject to the availability of funding, enrollment of veterans in the VA MVP study, and the VA MVP’s continued demand for our services. We have no certainty that funding will be made available for our services. If the priorities of the VA, the VA MVP, or the U.S. government change, funding for our services may be limited or not available, and our business, financial condition, and operating results and cash flows would be materially harmed. The success of our business and our future operating results are significantly dependent on the VA MVP’s receipt of funding for use of our services and the terms of our sales to the VA MVP, including the price per sample, the number of samples and the timing of the VA MVP’s deliveries of samples.

If we cannot maintain our current customer relationships, or fail to acquire new customers, our revenue prospects will be reduced. Many of our customers are biopharmaceutical companies engaged in clinical trials of new drug candidates, which are expensive, can take many years to complete, and their outcome is inherently uncertain.

Our customers other than the VA MVP are primarily biopharmaceutical companies that use our services to support clinical trials. Our future success is substantially dependent on our ability to maintain our customer relationships and to establish new ones. Many factors have the potential to impact our customer relations,

 

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including the type of support our customers and potential customers require and our ability to deliver it, our customers’ satisfaction with our services, and other factors that may be beyond our control. Furthermore, our customers may decide to decrease or discontinue their use of our services due to changes in research and product development plans, failures in their clinical trials, financial constraints, or utilization of internal testing resources or tests performed by other parties, or other circumstances outside of our control.

We engage in conversations with customers regarding potential commercial opportunities on an ongoing basis in the event that one of these customers’ drug candidates is approved. There is no assurance that any of these conversations will result in a commercial agreement, or if an agreement is reached, that the resulting relationship will be successful or that clinical studies conducted as part of the engagement will produce successful outcomes. Speculation in the industry about our existing or potential relationships with biopharmaceutical companies could be a catalyst for adverse speculation about us, our services, and our technology, which can adversely affect our reputation and our business. In addition, the termination of these relationships could result in a temporary or permanent loss of revenue.

Our customers’ clinical trials are expensive, can take many years to complete, and their outcome is inherently uncertain. Failure can occur at any time during the clinical trial process. Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy traits despite having progressed through pre-clinical studies and early clinical trials. Many of the biopharmaceutical companies that are our customers do not have products approved for commercial sale and are not profitable. These customers must continue to raise capital in order to continue their development programs and to potentially continue as our customers. If our customers’ clinical trials fail or they are unable to raise sufficient capital to continue investing in their clinical programs, our revenues from these customers may decrease or cease entirely, and our business may be harmed. Furthermore, even if these customers have a drug approved for commercial sale, they may not choose to use our services as a companion diagnostic with their drug, thereby limiting our potential revenues.

The size of the potential future market for our services is an estimate and may be smaller than we believe.

Our estimate of the potential future market for our services is based on a number of internal and third-party estimates. While we believe these factors have historically provided and will continue to provide us with effective tools in estimating the total market for our services, these estimates may not be correct and the conditions supporting our estimates may change at any time, thereby reducing the predictive accuracy of these underlying factors. As a result, our estimates of the total addressable market for our services may prove to be incorrect. If the actual number of patients who would benefit from our services and the total addressable market for our services is smaller than we have estimated, our future growth could be adversely impacted. See the section titled “Market, Industry, and Other Data” for additional information regarding our estimates.

We rely on a limited number of suppliers, or in some cases, a sole supplier, for some of our laboratory instruments and materials, and we may not be able to find replacements or immediately transition to alternative suppliers should we need to do so.

We rely on a limited number of suppliers for sequencers and other equipment and materials that we use in our laboratory operations. For example, we rely on Illumina, Inc. (“Illumina”) as the sole supplier of sequencers and various associated reagents, and as the sole provider of maintenance and repair services for these sequencers. Our master subcontractor agreement with Illumina is set to expire in August 2021, and our various pricing agreements with Illumina are set to expire on various dates from June 2019 to December 2022. Any disruption in Illumina’s operations, or our inability to negotiate an extension to our agreements with Illumina on acceptable terms, or at all, could impact our supply chain and laboratory operations and our ability to conduct our business and generate revenue. Our suppliers could cease supplying these materials, reagents, and equipment at any time, or fail to provide us with sufficient quantities of materials or materials that meet our specifications. Our laboratory operations could be interrupted if we encounter delays or difficulties in securing equipment, materials, reagents, or sequencers, or if we cannot obtain an acceptable substitute. Any such interruption could significantly affect our business, financial condition, results of operations, and reputation.

 

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We believe that there are only a few manufacturers other than Illumina that are currently capable of supplying and servicing the equipment necessary for our laboratory operations, including sequencers and various associated reagents. The use of equipment or materials provided by these replacement suppliers would require us to alter our laboratory operations. Transitioning to a new supplier would be time-consuming and expensive, may result in interruptions in our laboratory operations, could affect the performance specifications of our laboratory operations, or could require that we revalidate our tests. We cannot assure you that we will be able to secure alternative equipment, reagents, and other materials, and bring such equipment, reagents, and materials on line and revalidate them without experiencing interruptions in our workflow. If we encounter delays or difficulties in securing, reconfiguring, or revalidating the equipment and reagents we require for our services, our business, financial condition, results of operations, and reputation could be adversely affected.

In addition, the Device Master File that we have filed with the FDA, which is focused on the technology, quality management, and validation of our platform, specifically on its use for the development of personalized immuno-therapies, is predicated on our use of specified equipment and processes, including Illumina sequencers and related equipment. The detailed information in the Device Master File is not shared with our customers, but with our permission they can reference our FDA file number in their Investigational New Drug filings with the FDA. If we were required to transition to a new supplier of sequencers or certain other equipment or processes in our laboratory, our Device Master File would need to be replaced or updated, and until such time as that occurred, customers for which we deliver services after the transition would not be able to reference our Device Master File, which would cause us to lose a competitive advantage.

If our sole laboratory facility becomes damaged or inoperable, or we are required to vacate the facility, our ability to sell and provide our services and pursue our research and development efforts may be jeopardized.

We currently derive our revenues from our genomic analysis conducted in our laboratory. We do not have any clinical reference laboratory facilities other than our facility in Menlo Park, California. Our facilities and equipment could be harmed or rendered inoperable by natural or man-made disasters, including fires, earthquakes, flooding, and power outages, which may render it difficult or impossible for us to sell or perform our services for some period of time. Northern California has recently experienced serious fires and the San Francisco Bay Area is considered to lie in an area with earthquake risk. The inability to sell or to perform our diagnostic and other services, or the backlog of samples that could develop if our facility is inoperable for even a short period of time, may result in the loss of customers or harm to our reputation or relationships with scientific or clinical collaborators, and we may be unable to regain those customers or repair our reputation or such relationships in the future. Furthermore, our facilities and the equipment we use to perform our services and our research and development work could be costly and time-consuming to repair or replace.

Additionally, a key component of our research and development process involves using biological samples as the basis for the development of our services. In some cases, these samples are difficult to obtain. If the parts of our laboratory facility where we store these biological samples were damaged or compromised, our ability to pursue our research and development projects, as well as our reputation, could be jeopardized. We carry insurance for damage to our property and the disruption of our business, but this insurance may not be sufficient to cover all of our potential losses and may not continue to be available to us on acceptable terms, if at all.

Further, if our laboratory became inoperable, we would likely not be able to license or transfer our technology to another facility with the necessary qualifications, including state licensure and CLIA certification, under the scope of which our current and our planned future services could be performed. Even if we find a facility with such qualifications to perform our services, it may not be available to us on commercially reasonable terms.

 

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Our internal information technology systems, or those of our third-party vendors, contractors, or consultants, may fail or suffer security breaches, loss or leakage of data, and other disruptions, which could result in a material disruption of our services, compromise sensitive information related to our business, or prevent us from accessing critical information, potentially exposing us to liability or otherwise adversely affecting our business.

We are increasingly dependent upon information technology systems, infrastructure, and data to operate our business. In the ordinary course of business, we collect, store, and transmit confidential information (including but not limited to intellectual property, proprietary business information, and personal information). It is critical that we do so in a secure manner to maintain the confidentiality and integrity of such confidential information. We also have outsourced elements of our operations to third parties, and as a result we manage a number of third-party vendors and other contractors and consultants who have access to our confidential information.

Despite the implementation of security measures, given the size and complexity of our internal information technology systems and those of our third-party vendors and other contractors and consultants, and the increasing amounts of confidential information that they maintain, our such information technology systems are potentially vulnerable to breakdown or other damage or interruption from service interruptions, system malfunction, natural disasters, terrorism, war, and telecommunication and electrical failures, as well as security breaches from inadvertent or intentional actions by our employees, third-party vendors, contractors, consultants, business partners, and/or other third parties, or from cyber-attacks by malicious third parties (including the deployment of harmful malware, ransomware, denial-of-service attacks, social engineering, and other means to affect service reliability and threaten the confidentiality, integrity, and availability of information), which may compromise our system infrastructure, or that of our third-party vendors and other contractors and consultants, or lead to data leakage. The risk of a security breach or disruption, particularly through cyber-attacks or cyber intrusion, including by computer hackers, foreign governments, and cyber terrorists, has generally increased as the number, intensity, and sophistication of attempted attacks and intrusions from around the world have increased. We may not be able to anticipate all types of security threats, and we may not be able to implement preventive measures effective against all such security threats. The techniques used by cyber criminals change frequently, may not be recognized until launched, and can originate from a wide variety of sources, including outside groups such as external service providers, organized crime affiliates, terrorist organizations, or hostile foreign governments or agencies. To the extent that any disruption or security breach were to result in a loss of, or damage to, our data or applications, or those of our third-party vendors and other contractors and consultants, or inappropriate disclosure of confidential or proprietary information, we could incur liability and reputational damage and the further development and commercialization of our services could be delayed. The costs related to significant security breaches or disruptions could be material and exceed the limits of the cybersecurity insurance we maintain against such risks. If the information technology systems of our third-party vendors and other contractors and consultants become subject to disruptions or security breaches, we may have insufficient recourse against such third parties and we may have to expend significant resources to mitigate the impact of such an event, and to develop and implement protections to prevent future events of this nature from occurring.

While we have not experienced any such system failure, accident, or security breach to date, and believe that our data protection efforts and our investment in information technology reduce the likelihood of such incidents in the future, we cannot assure you that our data protection efforts and our investment in information technology will prevent significant breakdowns, data leakages, breaches in our systems, or those of our third-party vendors and other contractors and consultants, or other cyber incidents that could have a material adverse effect upon our reputation, business, operations, or financial condition. For example, if such an event were to occur and cause interruptions in our operations, or those of our third-party vendors and other contractors and consultants, it could result in a material disruption of our programs and the development of our services and technologies could be delayed. Furthermore, significant disruptions of our internal information technology systems or those of our third-party vendors and other contractors and consultants, or security breaches could result in the loss, misappropriation, and/or unauthorized access, use, or disclosure of, or the prevention of access to, confidential information (including trade secrets or other intellectual property, proprietary business

 

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information, and personal information), which could result in financial, legal, business, and reputational harm to us. For example, any such event that leads to unauthorized access, use, or disclosure of personal information, including personal information regarding our customers or employees, could harm our reputation directly, compel us to comply with federal and/or state breach notification laws and foreign law equivalents, subject us to mandatory corrective action, and otherwise subject us to liability under laws and regulations that protect the privacy and security of personal information, which could result in significant legal and financial exposure and reputational damages that could potentially have an adverse effect on our business.

Security breaches, loss of data, and other disruptions could compromise sensitive information related to our business or prevent us from accessing critical information and expose us to liability, which could adversely affect our business and our reputation.

In the ordinary course of our business, we collect and store sensitive data, including protected health information (“PHI”), personally identifiable information (“PII”), credit card and other financial information, intellectual property, and proprietary business information owned or controlled by ourselves or our customers, payors, and other parties. We manage and maintain our applications and data utilizing a combination of on-site systems and cloud-based data centers. We utilize external security and infrastructure vendors to manage parts of our data centers. We also communicate sensitive data, including patient data, electronically, and through relationships with multiple third-party vendors and their subcontractors. These applications and data encompass a wide variety of business-critical information, including research and development information, patient data, commercial information, and business and financial information. We face a number of risks relative to protecting this critical information, including loss of access risk, inappropriate use or disclosure, inappropriate modification, and the risk of our being unable to adequately monitor, audit, and modify our controls over our critical information. This risk extends to the third-party vendors and subcontractors we use to manage this sensitive data.

The secure processing, storage, maintenance, and transmission of this critical information are vital to our operations and business strategy, and we devote significant resources to protecting such information. Although we take measures to protect sensitive data from unauthorized access, use or disclosure, our information technology and infrastructure may be vulnerable to attacks by hackers or viruses or breached due to employee error, malfeasance, or other malicious or inadvertent disruptions. Any such breach or interruption could compromise our networks and the information stored there could be accessed by unauthorized parties, manipulated, publicly disclosed, lost, or stolen. Any such access, breach, or other loss of information could result in legal claims or proceedings, liability under federal or state laws that protect the privacy of personal information, such as the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) and the Health Information Technology for Economic and Clinical Health Act (“HITECH”), and regulatory penalties. Notice of breaches must be made to affected individuals, the Secretary of the Department of Health and Human Services (“HHS”), and for extensive breaches, notice may need to be made to the media or state attorneys general. Such a notice could harm our reputation and our ability to compete. Although we have implemented security measures and a formal, dedicated enterprise security program to prevent unauthorized access to patient data, such data is currently accessible through multiple channels, and there is no guarantee we can protect our data from breach. Unauthorized access, loss, or dissemination could also damage our reputation or disrupt our operations, including our ability to conduct our analyses, deliver test results, process claims and appeals, provide customer assistance, conduct research and development activities, collect, process, and prepare company financial information, provide information about our tests and other patient and physician education and outreach efforts through our website, and manage the administrative aspects of our business.

Penalties for violations of these laws vary. For instance, penalties for failure to comply with a requirement of HIPAA and HITECH vary significantly, and include significant civil monetary penalties and, in certain circumstances, criminal penalties with fines up to $250,000 per violation and/or imprisonment. In addition, numerous breach incidents could lead to possible penalties in excess of $1.68 million. A person who knowingly obtains or discloses individually identifiable health information in violation of HIPAA may face a criminal penalty of up to $50,000 and up to one-year imprisonment. The criminal penalties increase if the wrongful

 

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conduct involves false pretenses or the intent to sell, transfer or use identifiable health information for commercial advantage, personal gain or malicious harm.

Further, various states, such as California and Massachusetts, have implemented similar privacy laws and regulations, such as the California Confidentiality of Medical Information Act, that impose restrictive requirements regulating the use and disclosure of health information and other personally identifiable information. These laws and regulations are not necessarily preempted by HIPAA, particularly if a state affords greater protection to individuals than HIPAA. Where state laws are more protective, we have to comply with the stricter provisions. In addition to fines and penalties imposed upon violators, some of these state laws also afford private rights of action to individuals who believe their personal information has been misused. California’s patient privacy laws, for example, provide for penalties of up to $250,000 and permit injured parties to sue for damages. The interplay of federal and state laws may be subject to varying interpretations by courts and government agencies, creating complex compliance issues for us and data we receive, use and share, potentially exposing us to additional expense, adverse publicity and liability. Further, as regulatory focus on privacy issues continues to increase and laws and regulations concerning the protection of personal information expand and become more complex, these potential risks to our business could intensify. Changes in laws or regulations associated with the enhanced protection of certain types of sensitive data, such as PHI or PII, for the treatment of genetic data, along with increased customer demands for enhanced data security infrastructure, could greatly increase our cost of providing our services, decrease demand for our services, reduce our revenues and/or subject us to additional liabilities.

In addition, the interpretation and application of consumer, health-related and data protection laws, especially with respect to genetic samples and data, in the United States, the European Union (the “EU”), and elsewhere are often uncertain, contradictory and in flux. For example, the EU-wide General Data Protection Regulation (EU) 2016/679 (“GDPR”) became applicable on May 25, 2018, replacing data protection laws issued by of each EU member state based on the Directive 95/46/EC (the “Directive”). Unlike the Directive, which needed to be transposed at a national level, the GDPR text is directly applicable in each EU member state, resulting in a more uniform application of data privacy laws across the EU. The GDPR imposes onerous accountability obligations requiring data controllers and processors to maintain a record of their data processing and policies. It requires data controllers to implement more stringent operational requirements for processors and controllers of personal data, including, for example, transparent and expanded disclosure to data subjects (in a concise, intelligible and easily accessible form) about how their personal information is to be used, imposes limitations on retention of information, increases requirements pertaining to health data and pseudonymized (i.e., key-coded) data, introduces mandatory data breach notification requirements and sets higher standards for data controllers to demonstrate that they have obtained valid consent for certain data processing activities. Fines for non-compliance with the GDPR will be significant—the greater of €20 million or 4% of global turnover. The GDPR provides that EU member states may introduce further conditions, including limitations, to make their own further laws and regulations limiting the processing of genetic, biometric or health data, which could limit our ability to collect, use and share European data, or could cause our compliance costs to increase, ultimately having an adverse impact on our business, and harm our business and financial condition. It is possible that these laws may be interpreted and applied in a manner that is inconsistent with our practices. If so, this could result in government-imposed fines or orders requiring that we change our practices, which could adversely affect our business. Further, the United Kingdom’s vote in favor of exiting the EU, often referred to as Brexit, has created uncertainty with regard to data protection regulation in the United Kingdom. In particular, it is unclear whether the United Kingdom will enact data protection legislation equivalent to the GDPR and how data transfers to and from the United Kingdom will be regulated.

Compliance with U.S. and international data protection laws and regulations could cause us to incur substantial costs or require us to change our business practices and compliance procedures in a manner adverse to our business. Moreover, complying with these various laws could require us to take on more onerous obligations in our contracts, restrict our ability to collect, use and disclose data, or in some cases, impact our ability to operate in certain jurisdictions. We rely on our customers to obtain valid and appropriate consents from data

 

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subjects whose genetic samples and data we process on such customers’ behalf. Given that we do not obtain direct consent from such data subjects and we do not audit our customers to ensure that they have obtained the necessary consents required by law, the failure of our customers to obtain consents that are in compliance with applicable law could result in our own non-compliance with privacy laws. Such failure to comply with U.S. and international data protection laws and regulations could result in government enforcement actions (which could include civil or criminal penalties), private litigation and/or adverse publicity and could negatively affect our operating results and business. Claims that we have violated individuals’ privacy rights, failed to comply with data protection laws, or breached our contractual obligations, even if we are not found liable, could be expensive and time consuming to defend, could result in adverse publicity and could have a material adverse effect on our business, financial condition and results of operations.

Our success depends on our ability to provide reliable, high-quality genomic data and analyses and to rapidly evolve to meet our customers’ needs.

Errors, including if our tests fail to accurately detect gene variants, or mistakes, including if we fail to or incompletely or incorrectly identify the significance of gene variants, could have a significant adverse impact on our business. We classify variants in accordance with guidelines that are subject to change and subject to our interpretation. There can also be flaws in the databases, third-party tools, algorithms we use, and in the software that handle automated parts of our classification protocol. If we receive poor quality or degraded samples, our tests may be unable to accurately detect gene variants or we may fail to or incompletely or incorrectly identify the significance of gene variants, which could have a significant adverse impact on our business.

Inaccurate results or misunderstandings of, or inappropriate reliance on, the information we provide to our customers could lead to, or be associated with, side effects or adverse events in patients who use our tests, including treatment-related death, and could lead to termination of our services or claims against us. A product liability or professional liability claim could result in substantial damages and be costly and time-consuming for us to defend.

Although we maintain liability insurance, including for errors and omissions, and professional liability, we cannot assure you that our insurance would be sufficient to protect us from the financial impact of defending against these types of claims, or any judgments, fines or settlement costs arising out of any such claims. Any liability claim, including an errors and omissions liability claim, brought against us, with or without merit, could increase our insurance rates or prevent us from securing insurance coverage in the future. Additionally, any liability lawsuit could cause injury to our reputation or cause us to suspend sales of our tests or cause a suspension of our license to operate. The occurrence of any of these events could have an adverse effect on our business, reputation and results of operations.

If we cannot develop services and products to keep pace with rapid advances in technology, medicine and science, or experience delays in developing such services and products, our operating results and competitive position could be harmed.

In recent years, there have been numerous advances in technologies relating to the diagnosis and treatment of cancer. Several new cancer drugs have been approved, and a number of new drugs are in pre-clinical and clinical development. There have also been advances in methods used to identify patients likely to benefit from these drugs based on analysis of biomarkers. We must continuously develop new services and products, enhance any existing services, and avoid delays in such developments and enhancements to keep pace with evolving technologies on a timely and cost-effective basis. Our current services and our planned future services and products (such as our planned liquid biopsy test) could become obsolete unless we continually innovate and expand them to demonstrate benefit in the diagnosis, monitoring, or prognosis of patients with cancer. New cancer therapies typically have only a few years of clinical data associated with them, and much of that data may not be disclosed by the pharmaceutical company that conducted the clinical trials. This could limit our ability to develop services and products based on, for example, biomarker analysis related to the appearance or

 

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development of resistance to those therapies. If we cannot adequately demonstrate the clinical utility of our services and our planned future services and products to new treatments, sales of our services could decline, which would have a material adverse effect on our business, financial condition, and results of operations.

We are researching and developing improvements to our tests and test features on a continuous basis, but we may not be able to make these improvements on a timely basis, and even if we do, we may not realize the benefits of these efforts in our financial results.

To remain competitive, we must continually research and develop improvements to our tests or test features. However, we cannot assure you that we will be able to develop and commercialize the improvements to our tests or test features on a timely basis. Our competitors may develop and commercialize competing or alternative tests and improvements faster than we are able to do so. In addition, we must expend significant time and funds in order to conduct research and development, further develop and scale our laboratory processes, and further develop and scale our infrastructure. We may never realize a return on investment on this effort and expense, especially if our improvements fail to perform as expected. If we are not able to realize the benefits of our efforts to improve our tests or test features, it could have an adverse effect on our business, financial condition, and results of operations.

Personalized cancer therapies represent new therapeutic approaches that could result in heightened regulatory scrutiny, delays in clinical development, or delays in or inability to achieve regulatory approval, commercialization, or payor coverage, any of which could adversely affect our business.

We currently work with certain companies developing personalized cancer therapies, and our future success will in part depend on our personalized cancer customers obtaining regulatory approval for and commercializing their product candidate. Because personalized cancer therapies represent a new approach to immunotherapy for the treatment of cancer and other diseases, developing and commercializing personalized cancer therapies is subject to a number of challenges.

Actual or perceived safety issues, including adoption of new therapeutics or novel approaches to treatment, may adversely influence the willingness of subjects to participate in clinical studies, or if approved by applicable regulatory authorities, of physicians to subscribe to the novel treatment mechanics. The FDA or other applicable regulatory authorities may ask for specific post-market requirements, and additional information regarding benefits or risks of our services may emerge at any time prior to or after regulatory approval.

Physicians, hospitals, and third-party payors often are slow to adopt new products, technologies, and treatment practices that require additional upfront costs and training. Physicians may not be willing to undergo training to adopt personalized cancer therapies, may decide that such therapies are too complex to adopt without appropriate training or not cost-efficient, and may choose not to administer these therapies. Based on these and other factors, hospitals and payors may decide that the benefits of personalized cancer therapies do not or will not outweigh their costs.

The loss of key members of our executive management team could adversely affect our business.

Our success in implementing our business strategy depends largely on the skills, experience, and performance of key members of our executive management team and others in key management positions, including John West, our Chief Executive Officer, Richard Chen, our Chief Scientific Officer, Clinton Musil, our Chief Business Officer, and Aaron Tachibana, our Chief Financial Officer. The collective efforts of each of these persons and others working with them as a team are critical to us as we continue to develop our technologies, services, products, and research and development programs. As a result of the difficulty in locating qualified new management, the loss or incapacity of existing members of our executive management team could adversely affect our operations. If we were to lose one or more of these key employees, we could experience difficulties in finding qualified successors, competing effectively, developing our technologies, and implementing our business

 

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strategy. Each member of our executive management team has an employment agreement; however, the existence of an employment agreement does not guarantee retention of members of our executive management team and we may not be able to retain those individuals. We do not maintain “key person” life insurance on any of our employees.

In addition, we rely on collaborators, consultants, and advisors, including scientific and clinical advisors, to assist us in formulating our research and development and commercialization strategy. Our collaborators, consultants, and advisors are generally employed by employers other than us and may have commitments under agreements with other entities that may limit their availability to us.

The loss of a key employee, the failure of a key employee to perform in his or her current position, or our inability to attract and retain skilled employees could result in our inability to continue to grow our business or to implement our business strategy.

We rely on highly skilled personnel in a broad array of disciplines and if we are unable to hire, retain, or motivate these individuals, or maintain our corporate culture, we may not be able to maintain the quality of our services or grow effectively.

Our performance, including our research and development programs and laboratory operations, largely depends on our continuing ability to identify, hire, develop, motivate, and retain highly skilled personnel for all areas of our organization. Competition in our industry for qualified employees is intense, and we may not be able to attract or retain qualified personnel in the future, including bioinformatic scientists, bioinformatic engineers, software engineers, statisticians, variant curators, clinical laboratory scientists, and genetic counselors, due to the competition for qualified personnel among life science businesses, technology companies, as well as universities and public and private research institutions, particularly in the San Francisco Bay Area. All of our U.S. employees are at-will, which means that either we or the employee may terminate their employment at any time. In addition, our compensation arrangements, such as our equity award programs, may not always be successful in attracting new employees and retaining and motivating our existing employees, including due to movements in our stock price. If we are not able to attract and retain the necessary personnel to accomplish our business objectives, we may experience constraints that could adversely affect our ability to scale our business and support our research and development efforts and our laboratory operations. We believe that our corporate culture fosters innovation, creativity, and teamwork. However, as our organization grows, we may find it increasingly difficult to maintain the beneficial aspects of our corporate culture. This could negatively impact our ability to retain and attract employees and our future success.

We may not be able to manage our future growth effectively, which could make it difficult to execute our business strategy.

Our expected future growth could create a strain on our organizational, administrative, and operational infrastructure, including laboratory operations, quality control, customer service, marketing and sales, and management. We may not be able to maintain the quality of or expected turnaround times for our tests, or satisfy customer demand as our test volume grows. Our ability to manage our growth properly will require us to continue to improve our operational, financial, and management controls, as well as our reporting systems and procedures. As a result of our growth, our operating costs may escalate even faster than planned, and some of our internal systems may need to be enhanced or replaced. If we are unable to manage our growth effectively, it may be difficult for us to execute our business strategy and our business could be harmed.

We depend on our information technology systems, and any failure of these systems could harm our business.

We depend on information technology and telecommunications systems for significant elements of our operations, including our laboratory information management system, our bioinformatics analytical software

 

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systems, our database of information relating to genetic variations and their role in disease process, our clinical report systems, our billing systems, our business intelligence systems, our logistics and customer relationship systems, our customer-facing web-based software, our customer reporting, and our family history and risk assessment tools. We have installed, and expect to expand, a number of enterprise software systems that affect a broad range of business processes and functional areas, including, for example, systems handling human resources, financial reporting and controls, customer relationship management, regulatory compliance, and other infrastructure operations.

Although we invest substantially in the backup/restore, high-availability architecture, monitoring and reporting, documentation and preventive security controls of our systems, all information technology and telecommunications systems are vulnerable to damage from a variety of sources, including telecommunications or network failures, malicious or inadvertent human acts and natural disasters. Our servers are potentially vulnerable to physical or electronic break-ins, employee errors, computer viruses and similar disruptive problems. Despite the precautionary measures we have taken to prevent unanticipated problems that could affect our information technology and telecommunications systems, failures or significant downtime of our information technology or telecommunications systems or those used by our third-party service providers could prevent us from conducting tests, preparing and providing reports to our customers, billing customers, collecting revenue, handling inquiries from our customers, conducting research and development activities, and managing the administrative aspects of our business. For example, in the first quarter of 2018, we experienced downtime in our information technology systems in connection with the adoption of certain new information technology, and experienced an adverse effect to our results of operations in the first and second quarters of 2018 were adversely affected as a result. Any disruption or loss of information technology or telecommunications systems on which critical aspects of our operations depend could have an adverse effect on our business.

Additionally, we have internally developed, and expect to continue to invest in and expand, proprietary informatics and software systems that are designed to manage the unique aspects and challenges of our genomics laboratory and on which we depend. Any disruption of failure of our internally developed informatics and software systems could have an adverse effect on our business.

Our employees may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements, which could cause significant liability for us and harm our reputation.

We are exposed to the risk of employee fraud or other misconduct, including intentional failures to comply with government regulations, including federal and state healthcare fraud and abuse laws and regulations, to misuse information, including patient information, and to report financial information or data accurately or disclose unauthorized activities to us. Such misconduct could also involve the improper use of information obtained in the course of clinical studies, which could result in regulatory sanctions and cause serious harm to our reputation. We have a code of conduct and ethics for our directors, officers and employees, but it is not always possible to identify and deter employee misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business and results of operations, including the imposition of significant administrative, civil and criminal penalties, damages, fines, imprisonment, exclusion from government healthcare programs, contractual damages, refunding of payments received by us, reputational harm, additional reporting, or oversight obligations if we become subject to a corporate integrity agreement or other agreement to resolve allegations of non-compliance with the law and curtailment or restructuring of our operations. Whether or not we are successful in defending against such actions or investigations, we could incur substantial costs, including legal fees, and divert the attention of management in defending ourselves against any of these claims or investigations.

 

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We may acquire businesses or assets, form joint ventures, or make investments in other companies or technologies that could harm our operating results, dilute our stockholders’ ownership, or cause us to incur debt or significant expense.

As part of our business strategy, we may pursue acquisitions of complementary businesses or assets, as well as technology licensing arrangements. We may also pursue strategic alliances that leverage our core technology and industry experience to expand our offerings or distribution, or make investments in other companies. As an organization, we have limited experience with respect to acquisitions as well as the formation of strategic alliances and joint ventures. We may not identify or complete these transactions in a timely manner, on a cost-effective basis, or at all, and we may not realize the anticipated benefits of any acquisition, technology license, strategic alliance, joint venture or investment. In addition, we may not be able to find suitable partners or acquisition candidates, and we may not be able to complete such transactions on favorable terms, if at all. Any future acquisitions by us also could result in significant write-offs or the incurrence of debt and contingent liabilities, any of which could harm our operating results. If we make any acquisitions in the future, we may not be able to integrate these acquisitions successfully into our existing business, and we could assume unknown or contingent liabilities. Integration of an acquired company or business also may require management resources that otherwise would be available for ongoing development of our existing business.

To finance any acquisitions or investments, we may choose to raise additional funds. The various ways we could raise additional funds carry potential risks. See “—Our inability to raise additional capital on acceptable terms in the future may limit our ability to continue to operate our business and further expand our operations.” Once we become a public company, if the price of our common stock is low or volatile, we may not be able to acquire other companies using stock as consideration. Alternatively, it may be necessary for us to raise additional funds for these activities through public or private financings. Additional funds may not be available on terms that are favorable to us, or at all.

We rely on commercial courier delivery services to transport specimens to our laboratory facility in a timely and cost-efficient manner, and if these delivery services are disrupted, our business would be harmed.

Our business depends on our ability to quickly and reliably deliver test results to our customers. Disruptions in delivery service, whether due to labor disruptions, bad weather, natural disaster, terrorist acts, or threats or for other reasons could adversely affect specimen integrity and our ability to process specimens in a timely manner and service our customers, and ultimately our reputation and our business. In addition, if we are unable to continue to obtain expedited delivery services on commercially reasonable terms, our operating results may be adversely affected.

Ethical, legal, and social concerns related to the use of genetic information could reduce demand for our tests.

Genetic testing has raised ethical, legal, and social concerns regarding privacy and the appropriate uses of the resulting information. Governmental authorities have, through the Genetic Information Nondisclosure Act, and could further, for social or other purposes, limit or regulate the use of genetic information or genetic testing or prohibit testing for genetic predisposition to certain conditions, particularly for those that have no known cure. Ethical and social concerns may also influence governmental authorities to deny or delay the issuance of patents for technology relevant to our business. Similarly, these concerns may lead patients to refuse to use, or clinicians to be reluctant to order, genetic tests even if permissible. These and other ethical, legal, and social concerns may limit market acceptance of our tests or reduce the potential markets for our tests, either of which could have an adverse effect on our business, financial condition, or results of operations.

The December 2017 tax reform law could adversely affect our business and financial condition.

On December 22, 2017, President Trump signed into law comprehensive tax legislation (the “Tax Cuts and Jobs Act”) that significantly revised the Internal Revenue Code of 1986, as amended (the “Code”). The Tax Cuts

 

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and Jobs Act, among other things, contained significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for interest expense to 30% of adjusted taxable income (except for certain small businesses), limitation of the deduction for net operating losses incurred after 2017 to 80% of current year taxable income and elimination of net operating loss carrybacks, one-time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, elimination of U.S. tax on foreign earnings (subject to certain important exceptions), immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits. Notwithstanding the reduction in the corporate income tax rate, the overall impact of the Tax Cuts and Jobs Act is uncertain and our business and financial condition could be adversely affected. In addition, it is uncertain if and to what extent various states will conform to the Tax Cuts and Jobs Act. The impact of this tax reform on holders of our common stock is also uncertain and could be adverse. We urge our stockholders to consult with their legal and tax advisors with respect to this legislation and the potential tax consequences of investing in or holding our common stock.

Our effective tax rate may fluctuate, and we may incur obligations in tax jurisdictions in excess of accrued amounts.

We are subject to taxation in numerous U.S. states and territories. As a result, our effective tax rate is derived from a combination of applicable tax rates in the various places that we operate. In preparing our financial statements, we estimate the amount of tax that will become payable in each of such places. Nevertheless, our effective tax rate may be different than experienced in the past due to numerous factors, including passage of the Tax Cuts and Jobs Act, changes in the mix of our profitability from state to state, the results of examinations and audits of our tax filings, our inability to secure or sustain acceptable agreements with tax authorities, changes in accounting for income taxes and changes in tax laws. Any of these factors could cause us to experience an effective tax rate significantly different from previous periods or our current expectations and may result in tax obligations in excess of amounts accrued in our financial statements.

Risks Related to Government Regulation

Our tests may be subject to regulatory action if regulatory agencies determine that our tests do not appropriately comply with statutory and regulatory requirements enforced by the U.S. Food and Drug Administration, and/or CLIA requirements for quality laboratory testing.

The laws and regulations governing the marketing of clinical laboratory tests are extremely complex and in many instances there are no significant regulatory or judicial interpretations of these laws and regulations. The Federal Food, Drug and Cosmetic Act (the “FDC Act”) defines a medical device to include any instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent or other similar or related article, including a component, part, or accessory, intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment or prevention of disease, in man or other animals. Some of our tests may be considered by the FDA to be in vitro diagnostic products that are subject to regulation as medical devices. Among other things, pursuant to the FDC Act and its implementing regulations, the FDA regulates the research, testing, manufacturing, safety, labeling, storage, recordkeeping, premarket clearance or approval, marketing and promotion, and sales and distribution of medical devices in the United States to ensure that medical products distributed domestically are safe and effective for their intended uses. In addition, the FDA regulates the import and export of medical devices.

Although the FDA has statutory authority to assure that medical devices are safe and effective for their intended uses, the FDA has generally exercised its enforcement discretion and not enforced applicable regulations with respect to laboratory developed tests (“LDTs”), which are a subset of in vitro diagnostic devices that are intended for clinical use and designed, manufactured and used entirely within a single laboratory. We currently market our tests as LDTs and, therefore, we believe that they are not currently subject to the FDA’s enforcement of its medical device regulations and the applicable FDC Act provisions. Despite the FDA’s historic

 

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enforcement discretion policy with respect to LDTs, in November 2017, the FDA finalized a classification order setting out the regulatory requirements that apply to certain genetic health risk tests and revised a separate classification order exempting certain carrier screening tests from FDA premarket clearance and approval requirements when certain regulatory requirements are met. None of our tests comply with these classification orders because we market our tests as LDTs that are subject to the FDA’s policy of enforcement discretion. However, the FDA may find that our tests do not fall within the definition of an LDT, and may determine that our tests are subject to the FDA’s enforcement of its medical device regulations, including the recent classification orders, and the applicable FDC Act provisions. While we believe that we are currently in material compliance with applicable laws and regulations, we cannot assure you that the FDA or other regulatory agencies would agree with our determination, and a determination that we have violated these laws, or a public announcement that we are being investigated for possible violations of these laws, could adversely affect our business, prospects, results of operations or financial condition. If the FDA determines that our tests are subject to enforcement as medical devices, we could be subject to enforcement action, including administrative and judicial sanctions, and additional regulatory controls and submissions for our tests, all of which could be burdensome. See “—Failure to comply with federal, state, and foreign laboratory licensing requirements and the applicable requirements of the FDA or any other regulatory authority, could cause us to lose the ability to perform our tests, experience disruptions to our business or become subject to administrative or judicial sanctions.”

Moreover, LDTs may in the future become subject to more onerous regulation by the FDA. A significant change in any of the laws, regulations or policies may require us to change our business model in order to maintain regulatory compliance. At various times since 2006, the FDA has issued documents outlining its intent to require varying levels of FDA oversight of many types of LDTs. In October 2014, the FDA issued two non-binding draft guidance documents that set forth a proposed risk-based regulatory framework that would apply varying levels of FDA oversight to LDTs. The FDA indicated that it did not intend to implement its proposed framework until the draft guidance documents are finalized. The FDA was expected to finalize its proposal for the oversight of LDTs before the end of 2016, but in November 2016, the FDA announced that it would halt finalizing of the guidance documents and continue to work with stakeholders, the incoming administration and Congress on the approach to LDT regulation. This announcement was followed by the issuance of an information discussion paper on January 13, 2017, in which the FDA outlined a substantially revised “possible approach” to the oversight of LDTs. The discussion paper explicitly states that it is not a final version of the 2014 draft guidance and that it is not enforceable and does not represent the FDA’s “formal position.” It is unclear at this time if or when the FDA will finalize its plans to end enforcement discretion for LDTs, and even then, whether the new regulatory requirements are expected to be phased-in over time. However, the FDA may decide to regulate certain LDTs on a case-by-case basis at any time, which could result in delay or additional expense in offering our tests and tests that we may develop in the future.

Legislative proposals addressing oversight of genetic testing and LDTs have been introduced in previous Congresses, and we expect that new legislative proposals will be introduced from time to time in the future. We cannot provide any assurance that FDA regulation, including pre-market review, will not be required in the future for our tests, whether through finalization of guidance issued by the FDA, new enforcement policies adopted by the FDA or new legislation enacted by Congress. It is possible that legislation will be enacted into law or guidance could be issued by the FDA which may result in increased regulatory burdens for us to continue to offer our tests or to develop and introduce new tests. This legislative and regulatory uncertainty exposes us to the possibility of enforcement action or additional regulatory controls and submissions for our tests, both of which could be burdensome. We cannot be certain that the FDA will not enact rules or guidance documents which could impact our ability to purchase certain materials necessary for the performance of our tests, such as products labeled for research use only. Should any of the reagents obtained by us from suppliers and used in conducting our tests be affected by future regulatory actions, our business could be adversely affected by those actions, including increasing the cost of testing or delaying, limiting or prohibiting the purchase of reagents necessary to perform testing.

 

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Additionally, the Centers for Medicare & Medicaid Services (“CMS”), and certain state agencies regulate the performance of LDTs (as authorized under CLIA and state law, respectively). Our tests are developed in compliance with CLIA requirements. However, if our laboratory fails to comply with the prescribed quality requirements for laboratory testing or other requirements for CLIA, we could lose CLIA certification. That in turn would impact our ability to operate our laboratory and provide results to our customers, which could negatively impact our business operations.

If the FDA determines that our services are subject to enforcement as medical devices, we could incur substantial costs and time delays associated with satisfying statutory and regulatory requirements such as pre-market clearance or approval and we could incur additional expense in offering our tests and tests that we may develop in the future.

If the FDA determines that our tests and associated software do not fall within the definition of an LDT, or there are regulatory or legislative changes, we may be required to obtain premarket clearance for our tests and associated software under Section 510(k) of the FDC Act or approval of a premarket approval application (“PMA”). We would also be subject to ongoing regulatory requirements such as registration and listing requirements, medical device reporting requirements, and quality control requirements. If our tests are considered medical devices not subject to enforcement discretion, the regulatory requirements to which our tests are subject would depend on the FDA’s classification of our tests. The FDA has issued regulations classifying over 1,700 different generic types of medical devices into one of three regulatory control categories (Class I, Class II, or Class III) depending on the degree of regulation that the FDA finds necessary to provide reasonable assurance of their safety and effectiveness. The class into which a device is placed determines the requirements that a medical device manufacturer must meet both pre- and post-market.

Generally, Class I devices do not require premarket authorization, but are subject to a comprehensive set of regulatory authorities referred to as general controls. Class II devices, in addition to general controls, generally require special controls and premarket clearance through the submission of a section 510(k) premarket notification. Class III devices are subject to general controls and special controls, and also require premarket approval prior to commercial distribution, which is a more rigorous process than premarket clearance. Under the FDC Act, a device that is first marketed after May 28, 1976 is by default a Class III device requiring premarket approval unless it is within a type of generic device class that has been classified as Class I or Class II. Even if a device falls under an existing Class II, non-exempt, device classification, the product must also be shown to be “substantially equivalent” to a legally marketed predicate device through submission of a section 510(k) premarket notification. If after reviewing a firm’s 510(k) premarket notification, the FDA determines that a device is not substantially equivalent to a legally marketed predicate device, the new device is classified into Class III, requiring premarket approval. It is possible for a manufacturer to obtain a Class I or Class II designation without an appropriate predicate by submitting a de novo request for reclassification.

The process for submitting a 510(k) premarket notification and receiving FDA clearance usually takes from three to twelve months, but it can take significantly longer and clearance is never guaranteed. The process for submitting and obtaining FDA approval of a PMA is much more costly, lengthy, and uncertain. It generally takes from one to three years or even longer and approval is not guaranteed. PMA approval typically requires extensive clinical data and can be significantly longer, more expensive and more uncertain than the 510(k) clearance process. Despite the time, effort and expense expended, there can be no assurance that a particular device ultimately will be cleared or approved by the FDA through either the 510(k) clearance process or the PMA process on a timely basis, or at all.

If our tests are considered medical devices not subject to enforcement discretion, one classification regulation that could be relevant to one or more of our tests is a recently finalized classification for genetic health risk (“GHR”), assessment tests. On April 6, 2017, in response to a de novo request for reclassification submitted by another company, the FDA issued an order classifying genetic tests known as genetic health risk assessment systems (“GHR tests”) as Class II devices subject to premarket notification and specified special controls

 

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requirements. On November 7, 2017, the FDA codified this classification at 21 C.F.R. § 866.5950. If our tests are considered medical devices that are not subject to enforcement discretion and one or more of our tests is considered to fall under the 21 C.F.R. § 866.5950 classification regulation for GHR tests, or under another Class II classification that is subject to a premarket notification requirement, we would be required to obtain marketing clearance for such tests. Further, if considered to fall under the 21 C.F.R. § 866.5950 classification for GHR tests, our tests would be required to adhere to specified special controls, such as labeling and testing specifications and information about the test to be posted on the manufacturer’s website. Although the FDA has also issued a proposal for a simplified path to market GHR tests that would amend the classification regulation at 21 C.F.R. § 886.5950 such that manufacturers would only be subject to a one-time marketing review to ensure that they meet the applicable FDA requirements prior to selling GHR tests in the market, the FDA has yet to finalize this proposal, and we do not know if and when finalization will occur. Even if the FDA finalizes the proposed limited exemption for GHR tests, if any of our current or pipeline tests are not considered by the FDA to be GHR tests or do not qualify for the limited exemption (if and when finalized), or if any of our tests fall under a different non-exempt classification or are unclassified, we could be required to obtain 510(k) clearance or approval of a PMA for such test in the future.

If premarket review of our tests is required, the premarket review process may involve, among other things, successfully completing additional clinical trials. If we are required to conduct premarket clinical trials, whether using prospectively acquired samples or archival samples, delays in the commencement or completion of clinical testing could significantly increase our product development costs, delay commercialization of any future products, and interrupt sales of our current products. Many of the factors that may cause or lead to a delay in the commencement or completion of clinical trials may also ultimately lead to delay or denial of regulatory clearance or approval. The commencement of clinical trials may be delayed due to insufficient patient enrollment, which is a function of many factors, including the size of the patient population, the concerns around genetic testing, the nature of the protocol, the proximity of patients to clinical sites and the eligibility criteria for the clinical trial.

If we are required to conduct clinical trials, we and any third-party contractors we engage would be required to comply with good clinical practices (“GCPs”), which are regulations and guidelines enforced by the FDA, for products in clinical development. The FDA enforces these GCPs through periodic inspections of trial sponsors, principal investigators and trial sites. If we or any third-party contractor fails to comply with applicable GCPs, the clinical data generated in clinical trials may be deemed unreliable and the FDA may require us to perform additional clinical trials before clearing or approving our marketing applications. A failure to comply with these regulations may require us to repeat clinical trials, which would delay the regulatory clearance or approval process. In addition, if these parties do not successfully carry out their contractual duties or obligations or meet expected deadlines, or if the quality, completeness or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols or for other reasons, our clinical trials may have to be extended, delayed or terminated. Many of these factors would be beyond our control. We may not be able to enter into replacement arrangements without undue delays or considerable expenditures. If there are delays in testing or approvals as a result of the failure to perform by third parties, our research and development costs would increase, and we may not be able to obtain regulatory clearance or approval for our tests. In addition, we may not be able to establish or maintain relationships with these parties on favorable terms, if at all. Each of these outcomes would harm our ability to market our tests or to achieve or sustain profitability.

The FDA requires medical device manufacturers to comply with, among other things, current good manufacturing practices for medical devices, set forth in the Quality System Regulation at 21 C.F.R. Part 820, which requires manufacturers to follow elaborate design, testing, control, documentation and other quality assurance procedures during the manufacturing process; the medical device reporting regulation, which requires that manufacturers report to the FDA if their device or a similar device they market may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if it were to recur; labeling regulations, including the FDA’s general prohibition against promoting products for unapproved or “off-label” uses; the reports of corrections and removals regulation, which requires manufacturers to report to the FDA if a device correction or removal was initiated to reduce a risk to

 

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health posed by the device or to remedy a violation of the FDC Act caused by the device which may present a risk to health; and the establishment registration and device listing regulation.

Moreover, there can be no assurance that any cleared or approved labeling claims will be consistent with our current claims or adequate to support continued adoption of our products. If premarket review is required for some or all of our products, the FDA may require that we stop selling our products pending clearance or approval, which would negatively impact our business. Even if our products are allowed to remain on the market prior to clearance or approval, demand for our products may decline if there is uncertainty about our products, if we are required to label our products as investigational by the FDA, or if the FDA limits the labeling claims we are permitted to make for our products. As a result, we could experience significantly increased development costs and a delay in generating additional revenues from our services, or from other services or products now in development.

In addition, any clearance or approval we obtain for our products may contain requirements for costly post-market testing and surveillance to monitor the safety or efficacy of the product. The FDA has broad post-market enforcement powers, and if unanticipated problems with our products arise, or if we or our suppliers fail to comply with regulatory requirements following FDA clearance or approval, we may become subject to enforcement actions such as:

 

   

restrictions on manufacturing processes;

 

   

restrictions on product marketing;

 

   

warning letters;

 

   

withdrawal or recall of products from the market;

 

   

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

 

   

fines, restitution or disgorgement of profits or revenue;

 

   

suspension or withdrawal of regulatory clearances or approvals;

 

   

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

 

   

product seizures;

 

   

injunctions; or

 

   

imposition of civil or criminal penalties.

Moreover, the FDA strictly regulates the promotional claims that may be made about medical devices. In particular, a medical device may not be promoted for uses that are not approved by the FDA as reflected in the device’s approved labeling. However, companies may share truthful and not misleading information that is otherwise consistent with the product’s FDA approved labeling. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to significant civil, criminal and administrative penalties.

Failure to comply with federal, state, and foreign laboratory licensing requirements and the applicable requirements of the FDA or any other regulatory authority, could cause us to lose the ability to perform our tests, experience disruptions to our business, or become subject to administrative or judicial sanctions.

We are subject to CLIA, a federal law that regulates clinical laboratories that perform testing on specimens derived from humans for the purpose of providing information for the diagnosis, prevention, or treatment of disease. CLIA regulations establish specific standards with respect to personnel qualifications, facility

 

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administration, proficiency testing, quality control, quality assurance, and inspections. We have a current CLIA certificate to conduct our tests at our laboratory in Menlo Park, California. To renew this certificate, we are subject to survey and inspection every two years. Moreover, CLIA inspectors may make random inspections of our clinical reference laboratory.

We are also required to maintain a license to conduct testing in California. California laws establish standards for day-to-day operation of our clinical reference laboratory in Menlo Park, including the training and skills required of personnel and quality control. Several other states in which we operate also require that we hold licenses to test specimens from patients in those states, under certain circumstances. For example, our clinical reference laboratory is required to be licensed on a product-specific basis by New York as an out-of-state laboratory, and our products, as LDTs, must be approved by the New York State Department of Health (the “NYDOH”) on a product-by-product basis before they are offered in New York. We are subject to periodic inspection by the NYDOH and are required to demonstrate ongoing compliance with NYDOH regulations and standards. To the extent NYDOH identified any non-compliance and we are unable to implement satisfactory corrective actions to remedy such non-compliance, the State of New York could withdraw approval for our tests. Additionally, states such as Maryland, Pennsylvania, and Rhode Island may also require us to maintain out-of-state licenses. Other states may have similar requirements or may adopt similar requirements in the future. Although we have obtained licenses from states where we believe we are required to be licensed, we may become aware of other states that require out-of-state laboratories to obtain licensure in order to accept specimens from the state, and it is possible that other states currently have such requirements or will have such requirements in the future. We may also be subject to regulation in foreign jurisdictions as we seek to expand international utilization of our tests or such jurisdictions adopt new licensure requirements, which may require review of our tests in order to offer them or may have other limitations such as restrictions on the transport of human blood necessary for us to perform our tests that may limit our ability to make our tests available outside of the United States. Complying with licensure requirements in new jurisdictions may be expensive and/or time-consuming, may subject us to significant and unanticipated delays, or may be in conflict with other applicable requirements.

Failure to comply with applicable clinical laboratory licensure requirements may result in a range of enforcement actions, including license suspension, limitation, or revocation, directed plan of action, onsite monitoring, civil monetary penalties, and criminal sanctions as well as significant adverse publicity. Any sanction imposed under CLIA, its implementing regulations or state or foreign laws or regulations governing clinical laboratory licensure, or our failure to renew our CLIA certificate, a state or foreign license or accreditation, could have a material adverse effect on our business, financial condition and results of operations. Even if we were able to bring our laboratory back into compliance, we could incur significant expenses and potentially lose revenues in doing so.

Although we market our tests as LDTs that are currently subject to the FDA’s exercise of enforcement discretion, if we fail to operate within the conditions of that exercise of enforcement discretion, or if any of our products otherwise fail to comply with FDA regulatory requirements as enforced, we would be subject to the applicable requirements of the FDC Act and the FDA’s implementing regulations. The FDA is empowered to impose sanctions for violations of the FDC Act and the FDA’s implementing regulations, including warning letters, civil and criminal penalties, injunctions, product seizure or recall, import bans, restrictions on the conduct of our operations and total or partial suspension of production. Any of the aforementioned sanctions could cause reputational damage, undermine our ability to maintain and increase our revenues, and harm our business, financial condition, and results of operations. In particular, if we or the FDA discover that any of our products have defects that call into question the accuracy of their results, we may be required to undertake a retest of all results and analyses provided during the period relevant to the defect, or recall the affected products. The direct costs incurred in connection with such a recall in terms of management time, administrative and legal expenses and lost revenue, together with the indirect costs to our reputation could harm our business, financial condition and results of operations, and our ability to execute our business strategy. While we believe that we are currently in material compliance with applicable laws and regulations as currently enforced, the FDA or other regulatory

 

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agencies may not agree, and a determination that we have violated these laws or a public announcement that we are being investigated for possible violations of these laws could adversely affect our business, financial condition, results of operations, and prospects.

Complying with numerous statutes and regulations pertaining to our business is an expensive and time- consuming process, and any failure to comply could result in substantial penalties.

Our operations may be subject to other extensive federal, state, local, and foreign laws and regulations, all of which are subject to change. These laws and regulations currently include, among others:

 

   

the federal Anti-Kickback Statute, which prohibits knowingly and willfully offering, paying, soliciting, or receiving remuneration, directly or indirectly, overtly or covertly, in cash or in kind, in return for or to induce such person to refer an individual, or to purchase, lease, order, arrange for, or recommend purchasing, leasing or ordering, any good, facility, item or service that is reimbursable, in whole or in part, under a federal healthcare program. A person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation. In addition, the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the false claims statutes;

 

   

the federal Stark physician self-referral law, which prohibits a physician from making a referral for certain designated health services covered by the Medicare program, including laboratory and pathology services, if the physician or an immediate family member has a financial relationship with the entity providing the designated health services, and prohibits that entity from billing or presenting a claim for the designated health services furnished pursuant to the prohibited referral, unless an exception applies. Failure to refund amounts received as a result of a prohibited referral on a timely basis may constitute a false or fraudulent claim under the False Claims Act;

 

   

the “Anti-Markup Rule” and similar state and similar state laws, among other things, prohibits a physician or supplier billing the Medicare program from marking up the price of a purchased diagnostic service performed by another laboratory or supplier that does not “share a practice” with the billing physician or supplier. Penalties may apply to the billing physician or supplier if Medicare or another payer is billed at a rate that exceeds the performing laboratory’s charges to the billing physician or supplier, and the performing laboratory could be at risk under false claims laws, described below, for causing the submission of a false claim;

 

   

the federal civil and criminal false claims laws, including the False Claims Act, which impose liability on any person or entity that, among other things, knowingly presents, or causes to be presented, a false or fraudulent claim for payment to the federal government. These laws can apply to entities that provide information on coverage, coding, and reimbursement of their products and assistance with obtaining reimbursement to persons who bill payors. Private individuals can bring False Claims Act “qui tam” actions, on behalf of the government and such individuals, commonly known as “whistleblowers,” may share in amounts paid by the entity to the government in fines or settlement;

 

   

the federal Civil Monetary Penalties Law, which prohibits, among other things, the offering or transfer of remuneration to a Medicare or state healthcare program beneficiary if the person knows or should know it is likely to influence the beneficiary’s selection of a particular provider, practitioner, or supplier of services reimbursable by Medicare or a state healthcare program, unless an exception applies;

 

   

the federal Physician Payments Sunshine Act, which requires certain manufacturers of drugs, biologicals, and medical devices or supplies that require premarket approval by or notification to the FDA, and for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program (“CHIP”) to report annually to CMS information related to (i) payments and other transfers of value to physicians and teaching hospitals, and (ii) ownership and investment interests held by physicians and their immediate family members;

 

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the HIPAA fraud and abuse provisions, which created federal civil and criminal statutes that prohibit, among other things, defrauding healthcare programs, willfully obstructing a criminal investigation of a healthcare offense and falsifying or concealing a material fact or making any materially false statements in connection with the payment for healthcare benefits, items or services. Similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation;

 

   

the Eliminating Kickbacks in Recovery Act of 2018 (“EKRA”), which prohibits payments for referrals to recovery homes, clinical treatment facilities, and laboratories. EKRA’s reach extends beyond federal health care programs to include private insurance (i.e., it is an “all payer” statute);

 

   

other federal and state fraud and abuse laws, such as anti-kickback laws, prohibitions on self-referral, fee-splitting restrictions, insurance fraud laws, prohibitions on the provision of tests at no or discounted cost to induce physician or patient adoption, and false claims acts, which may extend to services reimbursable by any payer, including private insurers;

 

   

the prohibition on reassignment of Medicare claims, which, subject to certain exceptions, precludes the reassignment of Medicare claims to any other party;

 

   

state laws that prohibit other specified practices, such as billing physicians for testing that they order; waiving coinsurance, copayments, deductibles, and other amounts owed by patients; billing a state Medicaid program at a price that is higher than what is charged to one or more other payors employing, exercising control over, licensed professionals in violation of state laws prohibiting corporate practice of medicine and other professions, and prohibitions against the splitting of professional fees with licensed professionals; and

 

   

similar foreign laws and regulations that apply to us in the countries in which we operate or may operate in the future.

As a clinical laboratory, our business practices may face additional scrutiny from government regulatory agencies such as the Department of Justice, the HHS Office of Inspector General (the “OIG”) and CMS. Certain arrangements between clinical laboratories and referring physicians have been identified in fraud alerts issued by the OIG as implicating the Anti-Kickback Statute. The OIG has stated that it is particularly concerned about these types of arrangements because the choice of laboratory, as well as the decision to order laboratory tests, typically are made or strongly influenced by the physician, with little or no input from patients. Moreover, the provision of payments or other items of value by a clinical laboratory to a referral source could be prohibited under the Stark Law unless the arrangement meets all criteria of an applicable exception. The government has been active in enforcement of these laws as they apply to clinical laboratories.

The growth of our business and our expansion outside of the United States may increase the potential of violating these laws or our internal policies and procedures. The risk of our being found in violation of these or other laws and regulations is further increased by the fact that many have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. Any action brought against us for violation of these or other laws or regulations, even if we successfully defend against it, could cause us to incur significant legal expenses and reputational harm and divert our management’s attention from the operation of our business. If our operations are found to be in violation of any of these laws and regulations, we may be subject to any applicable penalty associated with the violation, including significant administrative, civil and criminal penalties, damages, fines, imprisonment, exclusion from participation in federal healthcare programs, refunding of payments received by us, integrity oversight and reporting obligations, and curtailment or cessation of our operations. Any of the foregoing consequences could seriously harm our business and our financial results.

 

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If we decide to grow our business by developing in vitro diagnostic tests, we may be subject to reimbursement challenges.

The coverage and reimbursement status of newly approved or cleared laboratory tests is uncertain. If we develop in vitro diagnostic tests and decide to seek reimbursement, and if such tests are inadequately covered by insurance and ineligible for such reimbursement, this could limit our ability to market any such future tests. The commercial success of future products in both domestic and international markets may depend in part on the availability of coverage and adequate reimbursement from third-party payors, including government payors, such as the Medicare and Medicaid programs, managed care organizations, and other third-party payors. The government and other third-party payors are increasingly attempting to contain health care costs by limiting both insurance coverage and the level of reimbursement for new diagnostic tests. As a result, they may not cover or provide adequate payment for any future in vitro diagnostic tests that we develop. These payors may conclude that our products are less safe, less effective, or less cost-effective than existing or later-introduced products. These payors may also conclude that the overall cost of using one of our tests exceeds the overall cost of using a competing test, and third-party payors may not approve any future in vitro diagnostic tests we develop for insurance coverage and adequate reimbursement.

We could be adversely affected by violations of the Foreign Corrupt Practices Act of 1977, as amended (the “FCPA”), and other worldwide anti-bribery laws.

We are subject to the FCPA, which prohibits companies and their intermediaries from making payments in violation of law to non-U.S. government officials for the purpose of obtaining or retaining business or securing any other improper advantage. Other U.S. companies in the medical device and pharmaceutical fields have faced criminal penalties under the FCPA for allowing their agents to deviate from appropriate practices in doing business with these individuals. We are also subject to similar anti-bribery laws in the jurisdictions in which we operate, including the United Kingdom’s Bribery Act of 2010, which also prohibits commercial bribery and makes it a crime for companies to fail to prevent bribery. These laws are complex and far-reaching in nature, and, as a result, we cannot assure you that we would not be required in the future to alter one or more of our practices to be in compliance with these laws or any changes in these laws or the interpretation thereof. Any violations of these laws, or allegations of such violations, could disrupt our operations, involve significant management distraction, involve significant costs and expenses, including legal fees, and could result in a material adverse effect on our business, prospects, financial condition or results of operations. We could also incur severe penalties, including criminal and civil penalties, disgorgement, and other remedial measures.

Expansion into international markets would subject us to increased regulatory oversight and regulatory, economic, social and political uncertainties, which could cause a material adverse effect on our business, financial position, and results of operations.

We may in the future expand our business and operations into international jurisdictions in which we have limited operating experience, including with respect to seeking regulatory approvals and marketing and selling products and services. If we expand internationally, our operations in these jurisdictions may be adversely affected by general economic conditions and economic and fiscal policy, including changes in exchange rates and controls, interest rates and taxation policies, increased government regulation, social stability and political, economic or diplomatic developments in the future. Certain jurisdictions have, from time to time, experienced instances of civil unrest and hostilities, both internally and with neighboring countries. Rioting, military activity, terrorist attacks, or armed hostilities could cause our operations in such jurisdictions to be adversely affected or suspended. We generally do not have insurance for losses and interruptions caused by terrorist attacks, military conflicts and wars. In addition, anti-bribery and anti-corruption laws may conflict with some local customs and practices in foreign jurisdictions. Our international operations may subject us to heightened scrutiny under the FCPA, the UK Bribery Act and similar anti-bribery laws, and could subject us to liability under such laws despite our best efforts to comply with such laws. As a result of our policy to comply with the FCPA, the UK Bribery Act and similar anti-bribery laws, we may be at a competitive disadvantage to competitors that are not subject to,

 

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or do not comply with, such laws. Further, notwithstanding our compliance programs, there can be no assurances that our policies will prevent our employees or agents from violating these laws or protect us from any such violations. Additionally, we cannot predict the nature, scope or impact of any future regulatory requirements that may apply to our international operations or how foreign governments will interpret existing or new laws. Alleged, perceived or actual violations of any such existing or future laws by us or due to the acts of others, may result in criminal or civil sanctions, including contract cancellations or debarment, and damage to our reputation, any of which could have a material adverse effect on our business.

Changes in health care policy could increase our costs, decrease our revenues, and impact sales of and reimbursement for our tests.

In March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (the “ACA”), became law. This law substantially changed the way health care is financed by both commercial payers and government payers, and significantly impacts our industry. The ACA contains a number of provisions that are expected to impact the business and operations of our customers, some of which in ways we cannot currently predict, including those governing enrollment in state and federal health care programs, reimbursement changes and fraud and abuse, which will impact existing state and federal health care programs and will result in the development of new programs.

Among other things, the ACA:

 

   

imposed an annual excise tax of 2.3% on any entity that manufactures or imports medical devices offered for sale in the United States, with limited exceptions, although the effective rate paid may be lower. Under the Consolidated Appropriations Act of 2016, the excise tax was suspended through December 31, 2017, and under the continuing resolution on appropriations for fiscal year 2018, signed by President Trump on January 22, 2018, was further suspended through December 31, 2019;

 

   

expanded eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage to additional individuals and by adding new mandatory eligibility categories for individuals with income at or below 133% of the federal poverty level, thereby potentially increasing manufacturers’ Medicaid rebate liability;

 

   

established a new Patient-Centered Outcomes Research Institute to oversee and identify priorities in comparative clinical efficacy research in an effort to coordinate and develop such research; and

 

   

established a Center for Medicare & Medicaid Innovation at CMS to test innovative payment and service delivery models to lower Medicare and Medicaid spending.

Some of the provisions of the ACA have yet to be implemented, and there have been judicial and Congressional challenges to certain aspects of the ACA, as well as recent efforts by the Trump administration to repeal or replace certain aspects of the ACA. Since January 2017, President Trump has signed two Executive Orders and other directives to delay the implementation of certain requirements of the ACA. Concurrently, Congress has considered legislation that would repeal or repeal and replace all or part of the ACA. While Congress has not passed comprehensive repeal legislation, it has enacted laws that modify certain provisions of the ACA such as removing penalties, starting January 1, 2019, for not complying with the ACA’s individual mandate to carry health insurance and delaying the implementation of certain ACA-mandated fees including, without limitation, the medical device excise tax. On December 14, 2018, a Texas U.S. District Court Judge ruled that the ACA is unconstitutional in its entirety because the “individual mandate” was repealed by Congress as part of the Tax Cuts and Jobs Act. While the Texas U.S. District Court Judge, as well as the Trump administration and CMS, have stated that the ruling will have no immediate effect pending appeal of the decision, it is unclear how this decision, subsequent appeals, and other efforts to repeal and replace the ACA will impact the ACA and our business. Additional legislation may be enacted that further amends, or repeals, the ACA, which could result in lower numbers of insured individuals, reduced coverage for insured individuals and adversely affect our and our customers’ business.

 

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In addition, other legislative changes have been proposed and adopted since the Affordable Care Act was enacted. On August 2, 2011, the Budget Control Act of 2011 was signed into law, which, among other things, reduced Medicare payments to providers by 2% per fiscal year, effective on April 1, 2013 and, due to subsequent legislative amendments to the statute, will remain in effect through 2027 unless additional Congressional action is taken. On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law, which, among other things, reduced Medicare payments to several providers, including hospitals, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. The Medicare Access and CHIP Reauthorization Act of 2015, enacted on April 16, 2015 (“MACRA”), repealed the formula by which Medicare made annual payment adjustments to physicians and replaced the former formula with fixed annual updates and a new system of incentive payments scheduled to begin in 2019 that are based on various performance measures and physicians’ participation in alternative payment models such as accountable care organizations.

In April 2014, Congress passed the Protecting Access to Medicare Act of 2014 (“PAMA”), which included substantial changes to the way in which clinical laboratory services are paid under Medicare. Under PAMA, laboratories that receive the majority of their Medicare revenue from payments made under the Medicare Clinical Laboratory Fee Schedule, or the Physician Fee Schedule are required to report to CMS, beginning in 2017 and every three years thereafter (or annually for “advanced diagnostic laboratory tests”), private payer payment rates and volumes for their tests. CMS will use this data to calculate a weighted median payment rate for each test, which will be used to establish revised Medicare reimbursement rates for the tests. Laboratories that fail to report the required payment information may be subject to substantial civil monetary penalties. It is unclear what impact new quality and payment programs, such as MACRA, or new pricing structures, such as those adopted under PAMA, may have on our business, financial condition, results of operations, or cash flows.

We anticipate there will continue to be proposals by legislators at both the federal and state levels, regulators and private payers to reduce costs while expanding individual healthcare benefits. Certain of these changes could impose additional limitations on the prices we will be able to charge for our tests, the coverage of or the amounts of reimbursement available for our tests from payers, including commercial payers and government payers.

If we use hazardous materials in a manner that causes injury, we could be liable for resulting damages.

Our activities currently require the use of hazardous chemicals and biological material. We cannot eliminate the risk of an accidental environmental release or injury to employees or third parties from the use, storage, handling, or disposal of these materials. In the event of an environmental release or injury, we could be held liable for any resulting damages, and any liability could exceed our resources or any applicable insurance coverage we may have. Additionally, we are subject on an ongoing basis to federal, state and local laws and regulations governing the use, storage, handling and disposal of these materials and specified waste products. The cost of maintaining compliance with these laws and regulations may become significant, and our failure to comply may result in substantial fines or other consequences, and either could negatively affect our operating results.

Risks Related to Our Intellectual Property

Litigation or other proceedings or third-party claims of intellectual property infringement, misappropriation or other violations may require us to spend significant time and money, and could in the future prevent us from selling our tests or impact our stock price, any of which could have a material adverse effect.

Our commercial success will depend in part on our avoiding infringement of patents and infringement, misappropriation or other violations of other proprietary rights of third parties, including for example the intellectual property of competitors. There is extensive intellectual property litigation involving the

 

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biotechnology and pharmaceutical industries and genetic sequencing technology. Our activities may be subject to claims that we infringe or otherwise violate patents owned or controlled by third parties. Numerous U.S. and foreign patents and pending patent applications exist in the genetic testing market and are owned by third parties. We cannot assure you that our operations do not, or will not in the future, infringe existing or future patents. For example, we are aware of several third-party issued U.S. patents and pending patent applications with claims relating to genetic sequencing technology and methodology that may be asserted against us and may be construed to encompass our products and services, including ACE ImmunoID and ImmunoID NeXT technology. In order to avoid infringing these third-party patents, we may find it necessary to or prudent to initiate invalidity proceedings against such patents or to obtain licenses from such third-party intellectual property holders. If we are not able to invalidate such patents or obtain or maintain a license on commercially reasonable terms and such third parties assert infringement claims against us, we may be prevented from exploiting our technology and our business, financial condition, results of operations, and prospects may be materially and adversely affected. We may also be unaware of patents that a third party, including for example a competitor in the genetic testing market, might assert are infringed by our business. There may also be patent applications that, if issued as patents, could be asserted against us. Patent applications in the United States and elsewhere are typically published approximately 18 months after the earliest filing for which priority is claimed, with such earliest filing date being commonly referred to as the priority date. Certain U.S. patent applications that will not be filed outside the United States can remain confidential until patents issue. Therefore, patent applications covering our products, services, or technologies could have been filed by third parties without our knowledge. Additionally, pending patent applications that have been published can, subject to certain limitations, be later amended in a manner that could cover our products, services, technologies, and their use. The scope of a patent claim is determined by an interpretation of the law, the written disclosure in a patent and the patent’s prosecution history and can involve other factors such as expert opinion. Our interpretation of the relevance or the scope of claims in a patent or a pending application may be incorrect, which may negatively impact our ability to market our products and services. Further, we may incorrectly determine that our technologies, products, or services are not covered by a third-party patent or may incorrectly predict whether a third party’s pending patent application will issue with claims of relevant scope. Our determination of the expiration date of any patent in the United States or abroad that we consider relevant may be incorrect, which may negatively impact our ability to develop and market our products or services.

Third-party intellectual property right holders may also actively bring infringement or other intellectual property-related claims against us, even if we have received patent protection for our technologies, products, and services. Regardless of the merit of third parties claims against us for infringement, misappropriation or violations of their intellectual property rights, such third parties may seek and obtain injunctive or other equitable relief, which could effectively block our ability to perform our tests. Further, if a patent infringement suit were brought against us, we could be forced to stop or delay our development or sales of any tests or other activities that are the subject of such suit. Defense of these claims, even if such claims are resolved in our favor, could cause us to incur substantial expenses and be a substantial diversion of our employee resources even if we are ultimately successful. Any adverse ruling or perception of an adverse ruling in defending ourselves could have a material adverse impact on our cash position and stock price. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available for development activities or any future sales, marketing, or distribution activities. We may not have sufficient financial or other resources to conduct such litigation or proceedings adequately. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources and more mature and developed intellectual property portfolios.

As we continue to commercialize our tests in their current or an updated form, launch different and expanded tests and enter new markets, other competitors might claim that our tests infringe, misappropriate or violate their intellectual property rights as part of business strategies designed to impede our successful commercialization and entry into new markets. If such a suit were brought, regardless of merit, there is no assurance that a court would find in our favor on questions of infringement, validity, enforceability or priority. Even if we are successful in defending against such suit, we could incur substantial costs and diversion of the

 

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attention of our management and technical personnel in defending ourselves against such claims. A court of competent jurisdiction could hold that third-party patents asserted against us are valid, enforceable, and infringed, which could materially and adversely affect our ability to commercialize any products, services or technologies we may develop and any other technologies covered by the asserted third-party patents and any adverse ruling or perception of an adverse ruling in defending ourselves could have a material adverse impact on our cash position and stock price. If we are found to infringe, misappropriate or otherwise violate a third party’s intellectual property rights, and we are unsuccessful in demonstrating that such rights are invalid or unenforceable, we may be required to pay substantial damages, including treble damages and attorneys’ fees for willful infringement; obtain one or more licenses from third parties in order to continue developing and marketing our products and technology, which may not be available on commercially reasonable terms (if at all) or may be non-exclusive, thereby giving our competitors and other third parties access to the same technologies licensed to us; pay substantial royalties and other fees; and redesign any infringing tests or other activities, which may be impossible or require substantial time and monetary expenditure, or be prohibited from commercializing certain tests, all of which could have a material adverse effect on our business, financial condition, results of operations, and prospects.

Where we collaborate with third parties in the development of technology, our collaborators may not properly maintain or defend our intellectual property rights or may use our proprietary information in such a way as to invite litigation that could jeopardize or invalidate our intellectual property or proprietary information. Further, collaborators may infringe the intellectual property rights of third parties, which may expose us to litigation and potential liability. Also, we may be obligated under our agreements with our collaborators, licensors, suppliers and others to indemnify and hold them harmless for damages arising from intellectual property infringement by us.

If we cannot license rights to use technologies on reasonable terms, we may not be able to commercialize new products in the future.

In the future, we may identify additional third-party intellectual property we may need to license in order to engage in our business, including to develop or commercialize new products or services. However, such licenses may not be available on acceptable terms or at all. Even if such licenses are available, we may be required to pay the licensor substantial royalties based on sales of our products and services. Such royalties are a component of the cost of our products or services and may affect the margins on our products and services. In addition, such licenses may be nonexclusive, which could give our competitors access to the same intellectual property licensed to us. If we are unable to enter into the necessary licenses on acceptable terms or at all, if any necessary licenses are subsequently terminated, if our licensors fail to abide by the terms of the licenses, if our licensors fail to prevent infringement by third parties, or if the licensed patents or other rights are found to be invalid or unenforceable, our business, financial condition, results of operations, and prospects could be materially and adversely affected.

If licenses to third-party intellectual property rights are or become required for us to engage in our business, the rights may be non-exclusive, which could give our competitors access to the same technology or intellectual property rights licensed to us. Moreover, we could encounter delays in the introduction of tests while we attempt to develop alternatives. Defense of any lawsuit or failure to obtain any of these licenses on favorable terms could prevent us from commercializing tests, which could materially affect our ability to grow and thus adversely affect our business and financial condition.

Developments or uncertainty in the patent statute, patent case law or U.S. Patent and Trademark Office (“USPTO”), rules and regulations may impact the validity, scope or enforceability of our patent rights, thereby impairing our ability to protect our products.

Our patent rights, their associated costs, and the enforcement or defense of such patent rights may be affected by developments or uncertainty in the patent statute, patent case law or USPTO rules and regulations.

 

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There are a number of recent changes to the patent laws that may have a significant impact on our ability to protect our technology and enforce our intellectual property rights. For example, the Leahy-Smith America Invents Act (the “AIA”) enacted within the last several years involves significant changes in patent legislation. These include provisions that affect the way patent applications will be prosecuted and may also affect patent litigation. As an example, assuming that other requirements for patentability are met, prior to March 2013, in the United States, the first to invent the claimed invention was entitled to the patent, while outside the United States, the first to file a patent application was entitled to the patent. On or after March 16, 2013, under the AIA, the United States transitioned to a first inventor to file system in which, assuming that other requirements for patentability are met, means that the party that is first to file in the United States generally is awarded the patent rights, regardless of whether such party invented the claimed invention first.

The AIA also includes a number of significant changes that affect the way patent applications will be prosecuted and also may affect patent litigation. These include allowing third party submission of prior art to the USPTO during patent prosecution and additional procedures to attack the validity of a patent by USPTO administered post-grant proceedings, including post-grant review, inter partes review, and derivation proceedings. Because of a lower evidentiary standard in USPTO proceedings compared to the evidentiary standard in United States federal courts necessary to invalidate a patent claim, a third party could potentially provide evidence in a USPTO proceeding sufficient for the USPTO to hold a claim invalid even though the same evidence would be insufficient to invalidate the claim if first presented in a district court action. Accordingly, a third party may attempt to use the USPTO procedures to invalidate our patent claims that would not have been invalidated if first challenged by the third party as a defendant in a district court action. The AIA and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business, financial condition, results of operations, and prospects.

Further, the standards applied by the USPTO and foreign patent offices in granting patents are not always applied uniformly or predictably. For example, there is no uniform worldwide policy regarding patentable subject matter or the scope of claims allowable in biotechnology patents. As such, we do not know the degree of future protection that we will have on our technologies, products, and services. While we will endeavor to try to protect our technologies, products, and services with intellectual property rights such as patents, as appropriate, the process of obtaining patents is time-consuming, expensive, and sometimes unpredictable.

In addition, the patent position of companies engaged in the development and commercialization of diagnostic tests is particularly uncertain. Various courts, including the Supreme Court have rendered decisions that affect the scope of patentability of certain inventions or discoveries relating to certain diagnostic tests and related methods. These decisions state, among other things, that a patent claim that recites an abstract idea, natural phenomenon or law of nature (for example, the relationship between particular genetic variants and cancer) are not themselves patentable. Precisely what constitutes a law of nature or abstract idea is uncertain, and it is possible that certain aspects of genetic diagnostics tests would be considered natural laws. Accordingly, the evolving case law in the United States may adversely affect our ability to obtain patents and may facilitate third-party challenges to any owned or licensed patents. The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States, and we may encounter difficulties in protecting and defending such rights in foreign jurisdictions. The legal systems of many other countries do not favor the enforcement of patents and other intellectual property protection, particularly those relating to biotechnology, which could make it difficult for us to stop the infringement of our patents in such countries. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial cost and divert our efforts and attention from other aspects of our business.

Patent terms may be inadequate to protect our competitive position for an adequate amount of time.

Patents have a limited lifespan. In the United States, the natural expiration of a patent is generally 20 years after its first effective non-provisional filing date. Although various extensions may be available, the life of a

 

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patent, and the protection it affords, is limited. Even if patents covering our technologies, products, and services are obtained, once the patent life has expired, we may be open to competition from competitive products. Our issued patents will expire on dates ranging from 2033 to 2035, subject to any patent extensions that may be available for such patents. If patents are issued on our pending patent applications, the resulting patents are projected to expire on dates ranging from 2033 to 2038. In addition, although upon issuance in the United States a patent’s life can be increased based on certain delays caused by the USPTO, this increase can be reduced or eliminated based on certain delays caused by the patent applicant during patent prosecution. If we do not have sufficient patent life to protect our technologies, products and services, our competitive position, business, financial condition, results of operations, and prospects will be adversely affected.

If we are not able to obtain and enforce patent protection for any products we develop and for our technologies, or if the scope of patent protection obtained is not sufficiently broad, our competitors and other third parties could develop and commercialize products and technology similar or identical to ours, and our ability to successfully commercialize our products, services, and technologies may be adversely affected.

We have applied, and we intend to continue applying, for patents covering such aspects of our technologies as we deem appropriate. However, the patent process is expensive, time consuming and complex, and we may not be able to apply for patents on certain aspects of our services, products, and other technologies in a timely fashion, at a reasonable cost, in all jurisdictions or at all, and any potential patent coverage we obtain may not be sufficient to prevent substantial competition.

Moreover, the patent position of biotechnology companies can be highly uncertain because it involves complex legal and factual questions for which important legal principles remain unresolved. No consistent policy regarding the breadth of claims allowed in such companies’ patents has emerged to date in the United States or elsewhere. Courts frequently render opinions in the biotechnology field that may affect the patentability of certain inventions or discoveries, including opinions that may affect the patentability of methods for analyzing nucleic acid sequences.

Others may independently develop similar or alternative technologies or design around technologies for which we may not be able to obtain patent protection. In addition, any patent applications we file may be challenged and may not result in issued patents or may be invalidated, rendered unenforceable or narrowed in scope after they are issued, and there is no guarantee any of our issued patents include or will include claims that are sufficiently broad to cover our products, services and other technologies or to provide meaningful protection from our competitors. Consequently, we do not know whether any of our platform advances, products, services and other technologies will be protectable or remain protected by valid and enforceable patents. Our competitors or other third parties may be able to circumvent our patents by developing similar or alternative technologies or products in a non-infringing manner.

Even if they are unchallenged, our patents and patent applications may not adequately protect our intellectual property, provide exclusivity for our technologies, products, and services, or prevent others from designing around our claims. Any finding that our patents or applications are invalid, unpatentable or unenforceable could harm our ability to prevent others from practicing the related technology, and a finding that others have inventorship or ownership rights to our patents and applications could require us to obtain certain rights to practice related technologies, which may not be available on favorable terms, if at all. If we initiate lawsuits to protect or enforce our patents, or litigate against third-party claims, which would be expensive, and, if we lose, we may lose some of our intellectual property rights. Furthermore, these lawsuits may divert the attention of our management and technical personnel. Any of the foregoing could have a material adverse effect on our competitive position, business, financial condition, results of operations, and prospects

Once granted, patents may remain open to opposition, interference, re-examination, post-grant review, inter partes review, nullification or derivation action in court or before patent offices or similar proceedings for a

 

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given period after allowance or grant, during which time third parties can raise objections against such initial grant. In the course of such proceedings, which may continue for a protracted period of time, the patent owner may be compelled to limit the scope of the granted claims thus attacked, or may lose the granted claims altogether. An adverse determination in any such proceeding or litigation could reduce the scope of, or invalidate, our patent rights, allow third parties to commercialize our technology or products and compete directly with us, without payment to us, or result in our inability to commercialize our products, services and technologies without infringing third-party patent rights. Such proceedings also may result in substantial cost and require significant time from our scientists and management, even if the eventual outcome is favorable to us. If the breadth or strength of protection provided by our patents and patent applications is threatened, regardless of the outcome, it could dissuade companies from collaborating with us to license, develop or commercialize current or future products or technologies. In addition, there can be no assurance that:

 

   

others will not or may not be able to make, use, offer to sell, or sell tests that are the same as or similar to our products or services but that are not covered by the claims of the patents that we own or license;

 

   

we or our future licensors or collaborators are the first to make the inventions covered by each of our issued patents and pending patent applications that we own or license;

 

   

we or our future licensors or collaborators are the first to file patent applications covering certain aspects of our inventions;

 

   

others will not independently develop similar or alternative technologies or duplicate any of our technologies without infringing our intellectual property rights;

 

   

a third party may not challenge our patents and, if challenged, a court would hold that our patents are valid, enforceable, and infringed;

 

   

any issued patents that we own or may license will provide us with any competitive advantages, or will not be challenged by third parties;

 

   

we may develop or in-license additional proprietary technologies that are patentable;

 

   

pending patent applications that we own or may license will lead to issued patents;

 

   

the patents of others will not have a material or adverse effect on our business, financial condition, results of operations, and prospects; and

 

   

our competitors do not conduct research and development activities in countries where we do not have enforceable patent rights and then use the information learned from such activities to develop competitive products for sale in our major commercial markets.

The issuance of a patent is not conclusive as to its inventorship, scope, validity, or enforceability. Some of our patents or patent applications may be challenged at a future point in time in opposition, derivation, reexamination, inter partes review, post-grant review, or interference proceedings. Any successful opposition to these patents or any other patents owned by or, if applicable in the future, licensed to us could deprive us of rights necessary for the practice of our technologies or the successful commercialization of any products or technologies that we may develop, which could lead to increased competition to our business and harm our business. Since patent applications in the United States and most other countries are confidential for a period of time after filing, we cannot be certain that we or our licensors were the first to file any patent application related to our technologies, products, or services. Furthermore, an interference proceeding can be provoked by a third party or instituted by the USPTO to determine who was the first to invent any of the subject matter covered by the patent claims of our applications for any application with an effective filing date before March 16, 2013.

Where we obtain licenses from or collaborate with third parties, in some circumstances, we may not have the right to control the preparation, filing, and prosecution of patent applications, or to maintain the patents, covering technology that we license from third parties. We may also require the cooperation of our licensors and collaborators to enforce any licensed patent rights, and such cooperation may not be provided. Therefore, these

 

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patents and applications may not be prosecuted and enforced in a manner consistent with the best interests of our business. Moreover, if we do obtain necessary licenses, we will likely have obligations under those licenses, and any failure to satisfy those obligations could give our licensor the right to terminate the license. Termination of a necessary license could have a material adverse impact on our business.

It is also possible that we fail to file patent applications covering inventions made in the course of development and commercialization activities before a competitor or another third party files a patent application covering, or publishes information disclosing, a similar, independently-developed invention. Such competitor’s patent application may pose obstacles to our ability to obtain or limit the scope of patent protection we may obtain. Although we enter into non-disclosure and confidentiality agreements with parties who have access to confidential or patentable aspects of our research and development output, such as our employees, collaborators, contract manufacturers, consultants, advisors, and other third parties, any of these parties may breach the agreements and disclose such output before a patent application is filed, thereby jeopardizing our ability to seek patent protection. In addition, publications of discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the United States and other jurisdictions are typically not published until 18 months after filing, or in some cases not at all. Therefore, we cannot be certain that we or our licensors were the first to make the inventions claimed in our owned or licensed patents or pending patent applications, or were the first to file for patent protection of such inventions. To determine the priority of these inventions, we may have to participate in interference proceedings, derivation proceedings, inter partes review proceedings, or other post-grant proceedings declared by the USPTO that could result in substantial cost to us. The outcome of such proceedings is uncertain. No assurance can be given that other patent applications will not have priority over our patent applications. In addition, changes to the patent laws of the United States allow for various post-grant opposition proceedings, such as inter partes review proceedings, that have not been extensively tested, and their outcome is therefore uncertain. An unfavorable outcome could require us to cease using the related technology or to attempt to license rights to it from the prevailing party. Our business could be harmed if the prevailing party does not offer us a license on commercially reasonable terms or at all, or if a non-exclusive license is offered and our competitors gain access to the same technology. Furthermore, if third parties bring these proceedings against our patents, we could experience significant costs and management distraction.

We may become involved in lawsuits to protect or enforce our patents or other intellectual property, which could be expensive, time consuming, and unsuccessful.

Competitors may also infringe our patents or the patents of our licensing partners. In addition, our patents or the patents of our licensors may become involved in inventorship, priority, or validity disputes. To counter or defend against such claims can be expensive and time consuming. In an infringement proceeding, a court may refuse to stop the other party from using the technology at issue on the grounds that our owned and in-licensed patents do not cover the technology in question. Further in such proceedings, the defendant could counterclaim that our asserted patent covering our product is invalid or unenforceable, and the court may agree that our asserted patent is invalid or unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity or unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, including lack of novelty, obviousness or non-enablement. Grounds for an unenforceability assertion could be an allegation that someone connected with the prosecution of the patent withheld relevant information from the USPTO, or made a misleading statement, during prosecution. Third parties may also raise similar claims before administrative bodies in the United States or abroad, even outside the context of litigation. Such mechanisms include re-examination, post grant review, inter partes review, and equivalent proceedings in foreign jurisdictions (e.g., opposition proceedings). Such proceedings could result in revocation or amendment to our patents in such a way that they no longer cover our product. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to the validity question, for example, we cannot be certain that there is no invalidating prior art, of which we and the patent examiner were unaware during prosecution. An adverse result in any litigation or other proceeding could put one or more of our owned or in-licensed patents at risk of being invalidated or interpreted narrowly. Such a loss of patent protection could have a material adverse impact on our business. Furthermore, because of the substantial

 

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amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation.

Even if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims may cause us to incur significant expenses and could distract our personnel from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions, or other interim proceedings or developments, and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available for development activities or any future sales, marketing, or distribution activities. We may not have sufficient financial or other resources to conduct such litigation or proceedings adequately. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources and more mature and developed intellectual property portfolios. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace.

If we are unable to protect the confidentiality of our trade secrets and know-how, our business and competitive position would be harmed.

We seek protection for certain aspects of our technologies, products and services through the filing of patents, registration of copyrights and use of non-disclosure agreements. In addition, we also expect to rely on trade secrets and proprietary know-how protection for our confidential and proprietary information, and we have taken security measures to protect this information. These measures, however, may not provide adequate protection for our trade secrets, know-how, or other confidential information. Among other things, we seek to protect our trade secrets, know-how, and confidential information by entering into confidentiality agreements with parties who have access to them, such as our employees, collaborators, contract manufacturers, consultants, advisors, and other third parties. We cannot guarantee that we have entered into such agreements with each party that may have or have had access to our trade secrets or proprietary technology and processes. Moreover, there can be no assurance that any confidentiality agreements that we have with our employees, consultants, or other third parties will provide meaningful protection for our trade secrets, know-how, and confidential information or will provide adequate remedies in the event of unauthorized use or disclosure of such information. Despite these efforts, any of these parties may breach the agreements and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. Monitoring unauthorized uses and disclosures is difficult, and we do not know whether the steps we have taken to protect our proprietary technologies will be effective. Accordingly, there also can be no assurance that our trade secrets or know-how will not otherwise become known or be independently developed by competitors.

Enforcing a claim that a party illegally disclosed or misappropriated a trade secret can be difficult, expensive, and time-consuming, and the outcome is unpredictable. In addition, trade secrets may be independently developed by others in a manner that could prevent legal recourse by us. If any of our confidential or proprietary information, such as our trade secrets, were to be disclosed or misappropriated, or if any such information was independently developed by a competitor, our competitive position would be materially and adversely harmed.

Trade secrets and know-how can be difficult to protect as trade secrets and know-how will over time be disseminated within the industry through independent development, the publication of journal articles, and the movement of personnel skilled in the art from company to company or academic to industry scientific positions. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor or other third party, we would have no right to prevent such competitor from using that technology or information to compete with us, which could harm our competitive position. Because from time to time we expect to rely on third parties in the development, manufacture and distribution of our products and provision of our services, we must, at times, share trade secrets with them. We seek to protect our proprietary technology in part by entering into confidentiality agreements and, if applicable, material transfer agreements, license agreements, collaboration

 

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agreements, supply agreements, consulting agreements or other similar agreements with our advisors, employees, collaborators, licensors, suppliers, third-party contractors, and consultants prior to beginning research or disclosing proprietary information. These agreements typically limit the rights of the third parties to use or disclose our confidential information, including our trade secrets and know-how. Despite the contractual provisions employed when working with third parties, the need to share trade secrets, know-how, and other confidential information increases the risk that such trade secrets and know-how become known by our competitors, are inadvertently incorporated into the technology of others, or are disclosed or used in violation of these agreements. Given that our proprietary position is based, in part, on our know-how and trade secrets, a competitor’s discovery of our trade secrets or know-how, or other unauthorized use or disclosure would impair our competitive position and may have an adverse effect on our business and results of operations.

In addition, these agreements typically restrict the ability of our advisors, employees, collaborators, licensors, suppliers, third-party contractors, and consultants to publish data potentially relating to our trade secrets or know-how, although our agreements may contain certain limited publication rights. Despite our efforts to protect our trade secrets and know-how, our competitors may discover our trade secrets or know-how, either through breach of our agreements with third parties, independent development, or publication of information by any of our third-party collaborators. A competitor’s discovery of our trade secrets or know-how would impair our competitive position and have a material adverse impact on our business.

We may not be able to enforce our intellectual property rights throughout the world.

Filing, prosecuting, maintaining, defending, and enforcing patents on our products, services, and technologies in all countries throughout the world would be prohibitively expensive, and our intellectual property rights in some countries outside the United States can be less extensive than those in the United States. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and, further, may export otherwise infringing products to territories where we have patent protection or licenses but enforcement is not as strong as that in the United States. These products may compete with our products, and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing. In addition, the laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the United States, and many companies have encountered significant challenges in establishing and enforcing their proprietary rights outside of the United States. These challenges can be caused by the absence or inconsistency of the application of rules and methods for the establishment and enforcement of intellectual property rights outside of the United States. In addition, the legal systems of some countries, particularly developing countries, do not favor the enforcement of patents and other intellectual property protection, especially those relating to healthcare. This could make it difficult for us to stop the infringement of our patents, if obtained, or the misappropriation of our other intellectual property rights. For example, many foreign countries, including European Union countries, India, Japan, and China, have compulsory licensing laws under which a patent owner may be compelled under specified circumstances to grant licenses to third parties. In addition, many countries limit the enforceability of patents against third parties, including government agencies or government contractors. In these countries, patents may provide limited or no benefit given that we may have limited remedies available if patents are infringed or if we are compelled to grant a license to a third party, which could materially diminish the value of those patents and limit our potential revenue opportunities. Furthermore, patent protection must ultimately be sought on a country-by-country basis, which is an expensive and time-consuming process with uncertain outcomes. Accordingly, we may choose not to seek patent protection in certain countries, and we will not have the benefit of patent protection in such countries.

Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business. Accordingly, our efforts to protect our intellectual property rights in such countries may be inadequate. In addition, changes in the law and legal decisions by courts in the United States and foreign countries may affect our ability to obtain adequate protection for our products, services and other technologies and the enforcement of intellectual property. Any of the foregoing could have a material adverse effect on our competitive position, business, financial condition, results of operations, and prospects.

 

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Obtaining and maintaining patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.

The USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other provisions during the patent application and prosecution process. Periodic maintenance fees, renewal fees, annuity fees, and various other governmental fees on patents and/or applications will be due to be paid to the USPTO and various other governmental patent agencies outside of the United States in several stages over the lifetime of the patents and/or applications. We employ reputable professionals and rely on such third parties to help us comply with these requirements and effect payment of these fees with respect to the patents and patent applications that we own. Noncompliance events that could result in abandonment or lapse of a patent or patent application include failure to respond to official communications within prescribed time limits, non-payment of fees and failure to properly legalize and submit formal documents. In many cases, an inadvertent lapse can be cured by payment of a late fee or by other means in accordance with the applicable rules. However, there are situations in which noncompliance can result in abandonment or lapse of a patent or patent application, resulting in loss of patent rights in the relevant jurisdiction. In such an event, competitors might be able to enter the market earlier than would otherwise have been the case, which could have a material adverse effect on our competitive position, business, financial condition, results of operations, and prospects.

Third parties may assert that our employees or consultants have wrongfully used or disclosed confidential information or misappropriated trade secrets.

We employ individuals who were previously employed or otherwise engaged with universities or genetic testing, diagnostic or other healthcare companies, including our competitors or potential competitors.

Although we have policies to ensure that our employees and consultants do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that we or our employees or consultants have inadvertently or otherwise used or disclosed intellectual property, including trade secrets or other proprietary information, of a former employer or other third parties. Further, we may be subject to ownership disputes in the future arising, for example, from conflicting obligations of consultants or others who are involved in developing our intellectual property. Litigation may be necessary to defend against these claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees. Such claims could have a material adverse effect on our business, financial condition, results of operations, and prospects.

In addition, while it is our policy to require our employees and contractors who may be involved in the conception or development of intellectual property to execute agreements assigning such intellectual property to us, we may be unsuccessful in executing such an agreement with each party who, in fact, conceives or develops intellectual property that we regard as our own. The assignment of intellectual property rights may not be self-executing, or the assignment agreements may be breached, and we may be forced to bring claims against third parties, or defend claims that they may bring against us, to determine the ownership of what we regard as our intellectual property. Such claims could have a material adverse effect on our business, financial condition, results of operations, and prospects.

Our use of “open source” software could subject our proprietary software to general release, adversely affect our ability to sell our products and services, and subject us to possible litigation.

A portion of the products or technologies licensed, developed, and/or distributed by us incorporate so-called “open source” software and we may incorporate open source software into other products in the future. Such open source software is generally licensed by its authors or other third parties under open source licenses. Some

 

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open source licenses contain requirements that we disclose source code for modifications we make to the open source software and that we license such modifications to third parties at no cost. In some circumstances, distribution of our software in connection with open source software could require that we disclose and license some or all of our proprietary code in that software, as well as distribute our products or provide our services that use particular open source software at no cost to the user. We monitor our use of open source software in an effort to avoid uses in a manner that would require us to disclose or grant licenses under our proprietary source code; however, there can be no assurance that such efforts will be successful. Open source license terms are often ambiguous and such use could inadvertently occur. There is little legal precedent governing the interpretation of many of the terms of these licenses, and the potential impact of these terms on our business may result in unanticipated obligations regarding our products and technologies. Companies that incorporate open source software into their products have, in the past, faced claims seeking enforcement of open source license provisions and claims asserting ownership of open source software incorporated into their product. If an author or other third party that distributes such open source software were to allege that we had not complied with the conditions of an open source license, we could incur significant legal costs defending ourselves against such allegations. In the event such claims were successful, we could be subject to significant damages or be enjoined from the distribution of our products. In addition, if we combine our proprietary software with open source software in certain ways, under some open source licenses, we could be required to release the source code of our proprietary software, which could substantially help our competitors develop products that are similar to or better than ours and otherwise adversely affect our business. These risks could be difficult to eliminate or manage, and, if not addressed, could have a material adverse effect on our business, financial condition, and results of operations.

If we fail to comply with our obligations under license or technology agreements with third parties, we may be required to pay damages and we could lose license rights that are critical to our business.

We license certain intellectual property that is important to our business, and in the future we may enter into additional agreements that provide us with licenses to valuable intellectual property or technology. For example, our agreements with third parties, such as Illumina, include certain non-exclusive license rights that are essential to the operation of our business as it is currently conducted. If we fail to comply with any of the obligations under our license agreements, we may be required to pay damages and the licensor may have the right to terminate the license. Termination by the licensor would cause us to lose valuable rights, and could prevent us from selling our products and services, or inhibit our ability to commercialize future products and services. Our business would suffer if any current or future licenses terminate, if the licensors fail to abide by the terms of the license, if the licensors fail to enforce licensed patents against infringing third parties, if the licensed patents or other rights are found to be invalid or unenforceable, or if we are unable to enter into necessary licenses on acceptable terms. In addition, our rights to certain technologies, including those of Illumina, are licensed to us on a non-exclusive basis. The owners of these non-exclusively licensed technologies are therefore free to license them to third parties, including our competitors, on terms that may be superior to those offered to us, which could place us at a competitive disadvantage. Moreover, our licensors may own or control intellectual property that has not been licensed to us and, as a result, we may be subject to claims, regardless of their merit, that we are infringing or otherwise violating the licensor’s rights.

Any collaboration arrangements that we may enter into in the future may not be successful, which could adversely affect our ability to develop and commercialize our products.

Any future collaborations that we enter into may not be successful. The success of our collaboration arrangements will depend heavily on the efforts and activities of our collaborators. Collaborations are subject to numerous risks, which may include that:

 

   

collaborators have significant discretion in determining the efforts and resources that they will apply to collaborations;

 

   

collaborators may not pursue development and commercialization of our products or may elect not to continue or renew development or commercialization programs based on trial or test results, changes in

 

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their strategic focus due to the acquisition of competitive products, availability of funding, or other external factors, such as a business combination that diverts resources or creates competing priorities;

 

   

collaborators could independently develop, or develop with third parties, products that compete directly or indirectly with our products;

 

   

collaborators with marketing, manufacturing, and distribution rights to one or more products may not commit sufficient resources to or otherwise not perform satisfactorily in carrying out these activities;

 

   

we could grant exclusive rights to our collaborators that would prevent us from collaborating with others;

 

   

collaborators may not properly maintain or defend our intellectual property rights or may use our intellectual property or proprietary information in a way that gives rise to actual or threatened litigation that could jeopardize or invalidate our intellectual property or proprietary information or expose us to potential liability;

 

   

disputes may arise between us and a collaborator that causes the delay or termination of the research, development, or commercialization of our current or future products or that results in costly litigation or arbitration that diverts management attention and resources;

 

   

collaborations may be terminated, and, if terminated, may result in a need for additional capital to pursue further development or commercialization of the applicable current or future products;

 

   

collaborators may own or co-own intellectual property covering our products that results from our collaborating with them, and in such cases, we would not have the exclusive right to develop or commercialize such intellectual property; and

 

   

collaborators’ sales and marketing activities or other operations may not be in compliance with applicable laws resulting in civil or criminal proceedings.

If we are unable to successfully obtain rights to required third-party intellectual property rights or maintain the existing intellectual property rights we have, we may have to abandon development of that program and our business and financial condition could suffer.

We may be subject to claims challenging the inventorship of our patents and other intellectual property.

We or our licensors may be subject to claims that former employees, collaborators, or other third parties have an interest in our patents, trade secrets, or other intellectual property as an inventor or co-inventor. For example, we or our licensors may have inventorship disputes arise from conflicting obligations of employees, consultants, or others who are involved in developing our products, services, or technologies. Litigation may be necessary to defend against these and other claims challenging inventorship or our licensors’ ownership of our owned or in-licensed patents, trade secrets, or other intellectual property. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights, such as exclusive ownership of, or right to use, intellectual property that is important to our products, services, or technologies. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees. Any of the foregoing could have a material adverse effect on our business, financial condition, results of operations, and prospects.

If our trademarks and trade names are not adequately protected, then we may not be able to build name recognition in our markets of interest and our business may be adversely affected.

Our trademarks or trade names may be challenged, infringed, circumvented, or declared generic or determined to be infringing on other marks. We may not be able to protect our rights to these trademarks and trade names or may be forced to stop using these names, which we need for name recognition by potential partners or customers in our markets of interest. During trademark registration proceedings, we may receive

 

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rejections. Although we would be given an opportunity to respond to those rejections, we may be unable to overcome such rejections. In addition, in the USPTO and in comparable agencies in many foreign jurisdictions, third parties are given an opportunity to oppose pending trademark applications and to seek to cancel registered trademarks. Opposition or cancellation proceedings may be filed against our trademarks, and our trademarks may not survive such proceedings. If we are unable to establish brand name recognition based on our trademarks and trade names, we may not be able to compete effectively and our business may be adversely affected.

Risks Related to Being a Public Company

The requirements of being a public company may strain our resources, result in litigation and divert management’s attention.

As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”), the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of the stock exchange on which we will list, and other applicable securities rules and regulations. Complying with these rules and regulations has increased and will increase our legal and financial compliance costs, make some activities more difficult, time-consuming, or costly and increase demand on our systems and resources, particularly after we are no longer an “emerging growth company” as defined in the Jumpstart our Business Startups Act of 2012 (the “JOBS Act”). The Exchange Act requires, among other things, that we file annual, quarterly, and current reports with respect to our business and operating results. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are required to disclose changes made in our internal control and procedures on a quarterly basis. In order to maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight may be required. As a result, management’s attention may be diverted from other business concerns, which could adversely affect our business and operating results. We will need to hire additional employees or engage outside consultants to comply with these requirements, which will increase our costs and expenses.

In addition, changing laws, regulations, and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time-consuming. These laws, regulations, and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations, and standards, and this investment will result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and our business may be adversely affected. By disclosing information in this prospectus and in filings required of a public company, our business and financial condition will become more visible, which we believe may result in threatened or actual litigation, including by competitors and other third parties. If those claims are successful, our business could be seriously harmed. Even if the claims do not result in litigation or are resolved in our favor, the time and resources needed to resolve them could divert our management’s resources and seriously harm our business.

We also expect that being a public company and these new rules and regulations will make it more expensive for us to obtain director and officer liability insurance and, in the future, we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee and compensation committee, and qualified executive officers.

 

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In addition, as a result of our disclosure obligations as a public company, we will have reduced strategic flexibility and will be under pressure to focus on short-term results, which may materially and adversely affect our ability to achieve long-term profitability.

We are an emerging growth company, and any decision on our part to comply only with certain reduced reporting and disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act, and, for as long as we continue to be an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to emerging growth companies, including:

 

   

not being required to have our independent registered public accounting firm audit our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act;

 

   

reduced disclosure obligations regarding executive compensation in our periodic reports and annual report on Form 10-K; and

 

   

exemptions from the requirements of holding non-binding advisory votes on executive compensation and stockholder approval of any golden parachute payments not previously approved.

We could be an emerging growth company for up to five years following the closing of this offering. Our status as an emerging growth company will end as soon as any of the following takes place:

 

   

the last day of the fiscal year in which we have more than $1.07 billion in annual revenue;

 

   

the date we qualify as a “large accelerated filer,” with at least $700 million of equity securities held by non-affiliates;

 

   

the date on which we have issued, in any three-year period, more than $1.0 billion in non-convertible debt securities; or

 

   

the last day of the fiscal year ending after the fifth anniversary of the closing of this offering.

We cannot predict if investors will find our common stock less attractive if we choose to rely on any of the exemptions afforded emerging growth companies. If some investors find our common stock less attractive because we rely on any of these exemptions, there may be a less active trading market for our common stock and the market price of our common stock may be more volatile.

Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this accommodation and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

Material weaknesses in our internal control over financial reporting may cause us to fail to timely and accurately report our financial results or result in a material misstatement of our financial statements.

Management evaluates our internal control systems, processes, and procedures for compliance with the requirements of a smaller reporting company under Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”). This evaluation includes disclosure of any material weaknesses identified by our management in our internal control over financial reporting. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

In connection with preparation of our financial statements for the years ended December 31, 2017 and 2018, management identified a material weakness in our internal controls due to a lack of sufficient full-time

 

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accounting staff with requisite experience and deep technical accounting knowledge to (i) identify and resolve complex accounting issues under generally accepted accounting principles in the United States (“GAAP”) and (ii) allow for appropriate segregation of duties. The identified material weakness could result in misstatements to our consolidated financial statements that would be material and would not be prevented or detected on a timely basis.

We are evaluating and implementing additional procedures to remediate this material weakness, however, we cannot assure you that these or other measures will fully remediate the material weakness in a timely manner or prevent future material weaknesses from occurring. As part of our remediation plan to address the material weakness identified above, we hired a new Chief Financial Officer in March 2019 and are actively working to hire additional accounting employees with the specific technical accounting and financial reporting experience necessary for a public company. We will continue to assess the adequacy of our accounting personnel and resources, and will add additional personnel, as well as adjust our resources, as necessary, commensurate with any increase in the size and complexity of our business.

If we identify future material weaknesses in our internal controls over financial reporting or fail to meet the demands that will be placed upon us as a public company, including the requirements of the Sarbanes-Oxley Act, we may be unable to accurately report our financial results or report them within the timeframes required by law or stock exchange regulations. Failure to comply with Section 404 could also potentially subject us to sanctions or investigations by the U.S. Securities and Exchange Commission (the “SEC”) or other regulatory authorities. If additional material weaknesses exist or are discovered in the future, and we are unable to remediate any such material weakness, our reputation, financial condition, and operating results could suffer.

Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.

Upon closing of this offering, we will have implemented disclosure controls and procedures designed to provide reasonable assurance that information we must disclose in reports we file or submit under the Exchange Act is accumulated and communicated to management and recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC. However, any disclosure controls and procedures, no matter how well-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple errors or mistakes. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls. As a result, because of these inherent limitations in our control system, misstatements or omissions due to error or fraud may occur and may not be detected, which could result in failures to file required reports in a timely manner and filing reports containing incorrect information. Any of these outcomes could result in SEC enforcement actions, monetary fines or other penalties, damage to our reputation, and harm to our financial condition.

Risks Related to This Offering and Our Common Stock

An active trading market for our common stock may never develop or be sustained.

Prior to this offering, there has been no public market for our common stock. We have applied to list our common stock on The Nasdaq Global Market under the symbol “PSNL.” However, we cannot assure you that an active trading market for our common stock will develop on that exchange or elsewhere or, if developed, that any market will be sustained. Accordingly, we cannot assure you of the likelihood that an active trading market for our common stock will develop or be maintained, the liquidity of any trading market, your ability to sell your shares of our common stock when desired, or the prices that you may obtain for your shares. Further, an inactive market may also impair our ability to raise capital by selling our common stock and may impair our ability to

 

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enter into strategic partnerships or acquire businesses, products, or technologies using our common stock as consideration.

The market price of our common stock may be volatile or may decline steeply or suddenly regardless of our operating performance and we may not be able to meet investor or analyst expectations. You may not be able to resell your shares at or above the initial public offering price and may lose all or part of your investment.

The initial public offering price for our common stock will be determined through negotiations between the underwriters and us, and may vary from the market price of our common stock following this offering. If you purchase shares of our common stock in this offering, you may not be able to resell those shares at or above the initial public offering price. We cannot assure you that the market price following this offering will equal or exceed prices in privately negotiated transactions of our shares that have occurred from time to time before this offering. The market price of our common stock may fluctuate or decline significantly in response to numerous factors, many of which are beyond our control, including:

 

   

actual or anticipated fluctuations in our operating results;

 

   

failure to meet or exceed financial estimates and projections of the investment community or that we provide to the public;

 

   

issuance of new or updated research reports by securities analysts or changed recommendations for our stock;

 

   

competition from existing tests or new tests that may emerge;

 

   

announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures, collaborations, capital commitments, or by or pertaining to our customers, particularly the VA MVP;

 

   

the timing and amount of our investments in the growth of our business;

 

   

actual or anticipated changes in regulatory oversight of our business or issues we may face with regulators;

 

   

additions or departures of key management or other personnel;

 

   

inability to obtain additional funding;

 

   

sales of our common stock by us or our stockholders in the future;

 

   

disputes or other developments related to our intellectual property or other matters, including litigation; and

 

   

general economic, industry, and market conditions, including factors unrelated to our operating performance or the operating performance of our competitors.

In addition, the stock market in general, and the market for life sciences companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors may seriously affect the market price of our common stock, regardless of our actual operating performance. These fluctuations may be even more pronounced in the trading market for our stock shortly following this offering. In addition, in the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.

Moreover, because of these fluctuations, comparing our operating results on a period-to-period basis may not be meaningful. You should not rely on our past results as an indication of our future performance. This

 

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variability and unpredictability could also result in our failing to meet the expectations of industry or financial analysts or investors for any period. If our revenues or operating results fall below the expectations of analysts or investors or below any forecasts we may provide to the market, or if the forecasts we provide to the market are below the expectations of analysts or investors, the price of our common stock could decline substantially. Such a stock price decline could occur even when we have met any previously publicly stated revenues or earnings forecasts that we may provide.

Our quarterly results may fluctuate significantly, which could adversely impact the value of our common stock.

Our quarterly results of operations, including our revenue, gross margin, profitability, and cash flows, may vary significantly in the future, and period-to-period comparisons of our operating results may not be meaningful. Accordingly, our quarterly results should not be relied upon as an indication of future performance. Our quarterly financial results may fluctuate as a result of a variety of factors, many of which are outside of our control. For example, the VA and other large customers are not obliged to deliver tissue samples to us at any particular time or at all. The rate at which we receive tissue samples can vary dramatically from quarter to quarter, and is difficult or impossible for us to accurately forecast. Our receipt and processing of tissue samples from our customers leads to our recognition of revenue, and as such the variable rates of delivery of customer samples will lead to variations in our revenues from quarter to quarter. Fluctuations in quarterly results may adversely impact the value of our common stock. Factors that may cause fluctuations in our quarterly financial results include, without limitation, those listed elsewhere in this “Risk Factors” section. We also may face competitive pricing pressures, and we may not be able to maintain our pricing in the future, which would adversely affect our operating results.

Insiders may exercise significant control over our company and will be able to influence corporate matters.

Our directors, executive officers, and 5% or greater stockholders and their affiliates beneficially owned, in the aggregate, approximately 76.0% of our outstanding capital stock as of March 31, 2019. Upon the closing of this offering, this same group will hold approximately 59.3% of our outstanding capital stock, without giving effect to any purchases that certain of these holders may make through our directed share program. As a result, these stockholders will be able to exercise significant influence over all matters submitted to our stockholders for approval, including the election of directors and approval of significant corporate transactions, such as a merger or sale of our company or its assets. This concentration of ownership may have the effect of delaying or preventing a third party from acquiring control of our company and could adversely affect the market price of our common stock, and may not be in the best interests of our other stockholders.

Future sales of shares by existing stockholders, or the perception that such sales could occur, could cause our stock price to decline.

If our existing stockholders sell, or indicate an intent to sell, substantial amounts of our common stock in the public market after the 180-day contractual lock-up and other legal restrictions on resale discussed in this prospectus lapse, the trading price of our common stock could decline significantly and could decline below the initial public offering price. Based on 21,829,701 shares outstanding as of March 31, 2019 (and assuming the exercise in full of a warrant exercisable for 188,643 shares of common stock), upon the closing of this offering, we will have 28,496,368 outstanding shares of common stock. Of these shares, the 6,666,667 shares of common stock sold in this offering, plus any shares sold pursuant to the underwriters’ option to purchase additional shares, will be immediately freely tradable, without restriction, in the public market, unless they are purchased in this offering by our affiliates, as that term is defined in Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”) or if they are purchased in our directed share program. Morgan Stanley & Co. LLC, BofA Securities, Inc., and Cowen and Company, LLC, however, may, in their discretion, permit our officers, directors, and other stockholders who have entered to lock-up agreements in connection with this offering to sell shares prior to the expiration of the lock-up agreements.

 

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After the lock-up agreements pertaining to this offering expire, substantially all of such shares will be eligible for sale in the public market. In addition, upon issuance, the 4,381,884 shares of common stock subject to outstanding options under our stock option plans as March 31, 2019 will become eligible for sale in the public market in the future, subject to certain legal and contractual limitations. Moreover, 180 days after the closing of this offering, holders of up to an aggregate of 18,790,983 shares of our common stock (including an aggregate of 127,598 shares issuable upon the exercise of warrants that were outstanding as of March 31, 2019) will have the right to require us to register these shares under the Securities Act pursuant to an investors’ rights agreement. If our existing stockholders sell substantial amounts of our common stock in the public market, or if the public perceives that such sales could occur, this could have an adverse effect on the market price of our common stock.

We also intend to register shares of our common stock that we may issue under our equity incentive plans, totaling 4,745,324 shares subject to outstanding options and 7,440,524 additional shares reserved for issuance as of the closing of this offering. Once we register these shares, they will be freely tradable in the public market upon issuance, subject to volume and manner of sale limitations applicable to affiliates and other legal and contractual limitations.

We have broad discretion in how we may use the net proceeds from this offering, and we may not use them effectively.

We cannot specify with any certainty the particular uses of the net proceeds that we will receive from this offering. Our management will have broad discretion in applying the net proceeds we receive from this offering for any of the purposes described in section titled “Use of Proceeds.” You will not have the opportunity, as part of your investment decision, to assess whether we are using the net proceeds appropriately, and you will be relying on the judgment of our management regarding the use of these net proceeds. Our management may not apply the net proceeds in ways that increase the value of your investment. If our management fails to use these funds effectively, our business could be seriously harmed. Pending their use, the net proceeds from this offering may be invested in a way that does not produce income or that loses value.

We do not currently intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation of the value of our common stock.

We have never declared or paid cash dividends on our capital stock. We currently intend to retain any future earnings to finance the operation and expansion of our business, and we do not expect to pay any cash dividends on our common stock in the foreseeable future. In addition, our ability to pay cash dividends on our capital stock is limited by our credit agreement and may be prohibited or limited by the terms of any future debt financing arrangement. As a result, any investment returns on our common stock will depend upon increases in the value for our common stock, which are not certain.

Our ability to use net operating losses to offset future taxable income may be subject to limitations.

As of December 31, 2018, we had federal and state net operating loss carryforwards of approximately $87 million and approximately $48.6 million, respectively. Certain of our federal and state net operating loss carryforwards will begin to expire, if not utilized, beginning in 2031. These net operating loss carryforwards could expire unused and be unavailable to offset future income tax liabilities. Under the Tax Cuts and Jobs Act, federal net operating losses incurred in 2018 and in future years may be carried forward indefinitely, but the deductibility of such federal net operating losses is limited. It is uncertain if and to what extent various states will conform to the Tax Cuts and Jobs Act. In addition, under Section 382 of the Code, and corresponding provisions of state law, if a corporation undergoes an “ownership change,” which is generally defined as a greater than 50% change, by value, in its equity ownership over a three-year period, the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes (including certain tax credits) to offset its post-change income or taxes may be limited. It is possible that we have experienced an ownership change or that we will experience one in connection with this offering. We may experience ownership changes in the future as a

 

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result of subsequent shifts in our stock ownership, some of which may be outside of our control. If an ownership change occurs and our ability to use our net operating loss carryforwards is materially limited, it would harm our future operating results by effectively increasing our future tax obligations.

Purchasers in this offering will experience immediate and substantial dilution in the book value of their investment.

The initial public offering price of our common stock is substantially higher than the net tangible book value per share of our common stock as of March 31, 2019. Therefore, if you purchase our common stock in this offering, you will incur immediate dilution of $12.56 per share, based on an assumed initial public offering price of $15.00 per share, which is the midpoint of the price range on the cover page of this prospectus. This dilution is due to the substantially lower price paid by our investors who purchased shares prior to this offering as compared to the price offered to the public in this offering, and any previous exercise of stock options granted to our service providers. In addition, as of March 31, 2019, options to purchase 4,381,884 shares of our common stock with a weighted-average exercise price of approximately $3.62 per share were outstanding. The exercise of any of these options would result in additional dilution. As a result of the dilution to investors purchasing shares in this offering, investors may receive less than the purchase price paid in this offering, if anything, in the event of our liquidation. In addition, new investors who purchase shares in this offering will contribute approximately 52.4% of the total amount of equity capital raised by us through the date of this offering, but will only own approximately 23.4% of the outstanding equity capital. For a detailed description of the dilution that you will experience immediately after this offering, see the section titled “Dilution.”

Future sales and issuances of our common stock or rights to purchase common stock, including pursuant to our equity incentive plans, could result in additional dilution of the percentage ownership of our stockholders and could cause the stock price of our common stock to decline.

We may issue additional securities following the closing of this offering. In the future, we may sell common stock, convertible securities, or other equity securities in one or more transactions at prices and in a manner we determine from time to time. We also expect to issue common stock to employees, directors, and consultants pursuant to our equity incentive plans. If we sell common stock, convertible securities, or other equity securities in subsequent transactions, or common stock is issued pursuant to equity incentive plans, investors may be materially diluted. New investors in such subsequent transactions could gain rights, preferences, and privileges senior to those of holders of our common stock, including the holders of shares of our common stock sold in this offering.

If securities or industry analysts do not publish research or reports about our business, or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock will depend in part on the research and reports that equity research analysts publish about us and our business. We do not control these analysts or the content and opinions included in their reports. Securities analysts may elect not to provide research coverage of our company after the closing of this offering, and such lack of research coverage may adversely affect the market price of our common stock. The price of our common stock could also decline if one or more equity research analysts downgrade our common stock or issue other unfavorable commentary or cease publishing reports about us or our business. If one or more equity research analysts cease coverage of our company, we could lose visibility in the market, which in turn could cause our stock price to decline.

Holders of our common stock could be adversely affected if we issue preferred stock.

Pursuant to our amended and restated certificate of incorporation, our board of directors is authorized to issue up to 10,000,000 shares of preferred stock without any action on the part of our stockholders. Our board of directors will also have the power, without stockholder approval, to set the terms of any series of preferred stock

 

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that may be issued, including voting rights, dividend rights, preferences over our common stock with respect to dividends or in the event of a dissolution, liquidation, or winding up, and other terms. In the event that we issue preferred stock in the future that has preferences over our common stock with respect to payment of dividends or upon our liquidation, dissolution, or winding up, or if we issue preferred stock that is convertible into our common stock at greater than a one-to-one ratio, the voting and other rights of the holders of our common stock or the market price of our common stock could be adversely affected.

Delaware law and provisions in our amended and restated certificate of incorporation and amended and restated bylaws that will be in effect on the closing of this offering could make a merger, tender offer, or proxy contest difficult, thereby depressing the trading price of our common stock.

Our amended and restated certificate of incorporation and amended and restated bylaws that will be in effect on the closing of this offering contain provisions that could depress the trading price of our common stock by acting to discourage, delay or prevent a change of control of our company or changes in our management that the stockholders of our company may deem advantageous. These provisions include the following:

 

   

establish a classified board of directors so that not all members of our board of directors are elected at one time;

 

   

authorize the issuance of “blank check” preferred stock that our board of directors could use to implement a stockholder rights plan;

 

   

permit the board of directors to establish the number of directors and fill any vacancies and newly-created directorships;

 

   

provide that directors may only be removed for cause;

 

   

require super-majority voting to amend some provisions in our certificate of incorporation and bylaws;

 

   

eliminate the ability of our stockholders to call special meetings of stockholders;

 

   

prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;

 

   

provide that the board of directors is expressly authorized to make, alter, or repeal our bylaws;

 

   

restrict the forum for certain litigation against us to Delaware; and

 

   

establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by stockholders at annual stockholder meetings.

Any provision of our amended and restated certificate of incorporation or amended and restated bylaws, each of which will be in effect on the closing of this offering or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock. For information regarding these and other provisions, see the section titled “Description of Capital Stock—Anti-Takeover Effects of Delaware Law and Our Certificate of Incorporation and Bylaws.”

Our amended and restated certificate of incorporation that will be in effect on the closing of this offering will provide that the Court of Chancery of the State of Delaware and the federal district courts of the United States will be the exclusive forums for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees.

Our amended and restated certificate of incorporation that will be in effect on the closing of this offering will provide that the Court of Chancery of the State of Delaware is the exclusive forum for the following types of actions or proceedings under Delaware statutory or common law:

 

   

any derivative action or proceeding brought on our behalf;

 

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any action asserting a breach of fiduciary duty;

 

   

any action asserting a claim against us arising under the Delaware General Corporation Law, our amended and restated certificate of incorporation, or our amended and restated bylaws; and

 

   

any action asserting a claim against us governed by the internal affairs doctrine.

This provision would not apply to suits brought to enforce a duty or liability created by the Exchange Act or any other claim for which the U.S. federal courts have exclusive jurisdiction.

Our amended and restated certificate of incorporation that will be in effect on the closing of this offering will further provide that the federal district courts of the United States will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act, subject to and contingent upon a final adjudication in the State of Delaware of the enforceability of such exclusive forum provision.

These exclusive-forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees, which may discourage lawsuits against us and our directors, officers, and other employees. If a court were to find either exclusive-forum provision in our amended and restated certificate of incorporation that will be in effect on the closing of this offering to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving the dispute in other jurisdictions, which could seriously harm our business. For example, the Court of Chancery of the State of Delaware recently determined that a provision stating that U.S. federal district courts are the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act is not enforceable. However, this decision may be reviewed and ultimately overturned by the Delaware Supreme Court.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements about us and our industry that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future results of operations, financial condition, business strategy and plans, and objectives of management for future operations, including our statements regarding the benefits and timing of the roll-out of new technology, are forward-looking statements. In some cases, you can identify forward-looking statements because they contain words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will,” or “would,” or the negative of these words or other similar terms or expressions. Forward-looking statements in this prospectus include, but are not limited to, statements about:

 

   

the evolution of cancer therapies and market adoption of our services;

 

   

estimates of our total addressable market, future revenue, expenses, capital requirements, and our needs for additional financing;

 

   

our ability to compete effectively with existing competitors and new market entrants;

 

   

our ability to scale our infrastructure;

 

   

our ability to manage and grow our business by expanding our sales to existing customers or introducing our products to new customers;

 

   

expectations regarding our relationship with the VA MVP;

 

   

our ability to establish and maintain intellectual property protection for our products or avoid claims of infringement;

 

   

potential effects of extensive government regulation;

 

   

our ability to hire and retain key personnel;

 

   

our ability to obtain additional financing in this or future offerings;

 

   

the volatility of the trading price of our common stock;

 

   

our belief that FDA approval of personalized cancer therapies may drive benefits to our business;

 

   

our expectation regarding the time during which we will be an emerging growth company under the JOBS Act; and

 

   

our expectations regarding uses of proceeds from this offering.

You should not rely on forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this prospectus primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, and operating results. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors described in the section titled “Risk Factors” and elsewhere in this prospectus. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this prospectus. The results, events, and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this prospectus. While we believe that information provides a reasonable basis for these statements, that information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements.

 

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The forward-looking statements made in this prospectus relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this prospectus to reflect events or circumstances after the date of this prospectus or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments.

 

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MARKET, INDUSTRY, AND OTHER DATA

This prospectus contains estimates and information concerning our industry and our business, including estimated market size, projected growth rates of the markets in which we participate, and the prevalence of certain medical conditions. Unless otherwise expressly stated, we obtained this industry, business, market, medical, and other information from reports, research surveys, studies, and similar data prepared by third parties, industry, medical, and general publications, government data, and similar sources.

This information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to these estimates. We have not independently verified any third-party information and cannot assure you of its accuracy or completeness. Although we are responsible for all of the disclosure contained in this prospectus and we believe the market position, market opportunity, market size, and medical information included in this prospectus is reliable, such information is inherently imprecise. In addition, projections, assumptions, and estimates of our future performance and the future performance of the industry in which we operate are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the section titled “Risk Factors.” These and other factors could cause results to differ materially from those expressed in these publications and reports.

Certain information in the text of this prospectus is contained in independent industry publications. The source of these independent industry publications is provided below:

 

   

U.S. National Library of Medicine, ClinicalTrials.gov, January 2019.

 

   

Public Health Faculty Publications, SEER Cancer Statistics Review, 1975-2015.

 

   

American Cancer Society, Cancer Facts and Figures 2019, 2019.

 

   

American Cancer Society, Cancer Facts and Figures 2018, 2018.

 

   

BIO Industry Analysis, Clinical Development Success Rates 2006-2015, June 2016.

 

   

European Journal of Cancer, Cancer incidence and mortality patterns in Europe: Estimates for 40 countries and 25 major cancers in 2018, August, 9 2018.

 

   

World Health Organization, Latest global cancer data: Cancer burden rises to 18.1 million new cases and 9.6 million cancer deaths in 2018, September 12, 2018.

 

   

World Health Organization, World’s health ministers renew commitment to cancer prevention and control, 2017.

We use multiple sources and assumptions to estimate the total addressable market for tissue and liquid biopsy testing in clinical trials for immunotherapy, targeted cancer therapy, and personalized cancer therapy. Our estimates of the number of patients and clinical trials are based on data from the U.S. National Library of Medicine, ClinicalTrials.gov, January 2019. We assume that patients in such clinical trials will receive one tumor biopsy test and three liquid biopsy tests over the course of a clinical trial, and the cost of tumor and liquid biopsy tests will be $5,000 and $7,000 on average, respectively.

We also use multiple sources and assumptions to estimate the total addressable market for tissue and liquid biopsy testing in personalized cancer therapy. Our estimate of the number of cancer patients that are projected to be diagnosed with late-stage disease in 2019 is based on a combination of data derived from Public Health Faculty Publications, SEER Cancer Statistics Review, 1975-2015 (only data relating to cancer cases diagnosed—and the respective stage of disease upon diagnosis—from 2008 to 2014 was used for our purposes), American Cancer Society, Cancer Facts and Figures 2018, 2018, American Cancer Society, Cancer Facts and Figures 2019, 2019, and a review article from the European Journal of Cancer, Cancer incidence and mortality patterns in Europe: Estimates for 40 countries and 25 major cancers in 2018, August 9, 2018. We assume that personalized cancer therapy patients will receive one tumor biopsy test and three liquid biopsy tests over the course of a clinical trial or treatment, with the average cost per test being the same as is outlined above in the United States and $3,000 and $4,200 on average per test, respectively, in the European Union.

 

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We also use multiple sources and assumptions to estimate the total addressable market for oncology clinical diagnostic testing for advanced cancer therapies. Our estimate of the number of cancer patients that are projected to be diagnosed in 2019 is based on a combination of data derived from the American Cancer Society, Cancer Facts and Figures 2018, 2018, American Cancer Society, Cancer Facts and Figures 2019, 2019, and a review article from the European Journal of Cancer, Cancer incidence and mortality patterns in Europe: Estimates for 40 countries and 25 major cancers in 2018, August 9, 2018. We assume that pre-diagnosis cancer patients will receive one oncology clinical diagnostic test to inform their treatment strategy or to identify clinical trial enrollment opportunities, and the cost per test will be $3,000 on average, which we believe is in line with current cancer panels.

Certain monetary amounts, percentages, and other figures included elsewhere in this prospectus have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables or charts may not be the arithmetic aggregation of the figures that precede them, and figures expressed as percentages in the text may not total 100% or, as applicable, when aggregated may not be the arithmetic aggregation of the percentages that precede them.

 

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USE OF PROCEEDS

We estimate that we will receive net proceeds from this offering of approximately $89.8 million (or approximately $103.8 million if the underwriters exercise their over-allotment option in full) based on the assumed initial public offering price of $15.00 per share of common stock, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

A $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share of common stock would increase (decrease) the net proceeds to us from this offering by approximately $6.2 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions. Similarly, each increase (decrease) of 1.0 million shares in the number of shares of common stock offered by us would increase (decrease) the net proceeds to us from this offering by approximately $14.0 million, assuming the assumed initial public offering price of $15.00 per share of common stock remains the same, and after deducting estimated underwriting discounts and commissions.

The principal purposes of this offering are to increase our capitalization and financial flexibility, and create a public market for our common stock. We currently intend to use the net proceeds we receive from this offering for expanded research and development, infrastructure expansion, facilities expansion, headcount growth, sales and marketing expenditures, public company costs, capital expenditures, and working capital. We cannot specify with certainty all of the particular uses for the remaining net proceeds to us from this offering. We may also use a portion of the net proceeds for acquisitions or strategic investments in complementary businesses, services, products, or technologies. However, we do not have agreements or commitments to enter into any such acquisitions or investments at this time. We will have broad discretion over how to use the net proceeds to us from this offering. We intend to invest the net proceeds we receive from this offering in a variety of capital-preservation investments, including short- and intermediate-term, interest-bearing, investment-grade securities and government securities.

 

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DIVIDEND POLICY

We have never declared or paid cash dividends on our capital stock. We currently intend to retain all available funds and future earnings, if any, to fund the development and expansion of our business, and we do not anticipate paying any cash dividends in the foreseeable future. Any future determination regarding the declaration and payment of dividends will be at the discretion of our board of directors and will depend on then-existing conditions, including our financial condition, operating results, contractual restrictions, capital requirements, business prospects, and other factors our board of directors may deem relevant. In addition, we may enter into agreements in the future that could contain restrictions on payments of cash dividends.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and our capitalization as of March 31, 2019 as follows:

 

   

on an actual basis;

 

   

on a pro forma basis, giving effect to (i) the automatic conversion of all outstanding shares of our redeemable convertible preferred stock as of March 31, 2019 into 18,474,742 shares of common stock immediately prior to the closing of this offering, (ii) the cash exercise of a warrant to purchase 188,643 shares of our common stock, outstanding as of March 31, 2019, in full, (iii) the automatic conversion of two warrants to purchase an aggregate of 84,585 shares of our redeemable convertible preferred stock, outstanding as of March 31, 2019, into warrants to purchase an equivalent number of shares of our common stock, and the related reclassification of redeemable convertible preferred stock warrant liability to stockholders’ equity, (iv) stock-based compensation expense of $0.9 million associated with outstanding stock options subject to a performance condition for which the service-based vesting condition was satisfied as of March 31, 2019 and which we will recognize in connection with this offering, and (v) the filing and effectiveness of our amended and restated certificate of incorporation that will be in effect prior to the closing of this offering; and

 

   

on a pro forma as adjusted basis, giving effect to (i) the pro forma adjustments set forth above and (ii) the issuance and sale of 6,666,667 shares of common stock in this offering at the assumed initial public offering price of $15.00 per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

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The pro forma and pro forma as adjusted information below is illustrative only, and our capitalization following the closing of this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. You should read this information in conjunction with our consolidated financial statements and the related notes included in this prospectus and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and other financial information contained in this prospectus.

 

     As of March 31, 2019  
         Actual         Pro Forma     Pro Forma as
Adjusted(1)
 
     (unaudited)  
     (in thousands, except share and per share data)  

Cash and cash equivalents

   $ 33,237     $ 33,245     $ 123,045  
  

 

 

   

 

 

   

 

 

 

Long-term debt

   $ 18,941     $ 18,941     $ 18,941  
  

 

 

   

 

 

   

 

 

 

Convertible preferred stock warrant liability

   $ 817     $     $  
  

 

 

   

 

 

   

 

 

 

Series A redeemable convertible preferred stock, $0.0001 par value—31,250,00 shares authorized, 7,812,497 shares issued and outstanding, actual; no shares authorized, issued, or outstanding, pro forma and pro forma as adjusted (unaudited)

     20,261              

Series B redeemable convertible preferred stock, $0.0001 par value—19,288,150 shares authorized, 4,799,548 shares issued and outstanding, actual; no shares authorized, issued, or outstanding, pro forma and pro forma as adjusted (unaudited)

     22,047              

Series C redeemable convertible preferred stock, $0.0001 par value—24,700,000 shares authorized, 5,862,697 shares issued and outstanding, actual; no shares authorized, issued, or outstanding, pro forma and pro forma as adjusted (unaudited)

     47,096              
  

 

 

   

 

 

   

 

 

 

Total redeemable convertible preferred stock

   $       90,221     $     $  
  

 

 

   

 

 

   

 

 

 

Stockholders’ deficit:

      

Preferred stock, $0.0001 par value—no shares authorized, issued, or outstanding, actual; 10,000,000 shares authorized, no shares issued or outstanding, pro forma and pro forma as adjusted (unaudited)

                  

Common stock, $0.0001 par value—105,700,000 shares authorized, 3,166,316 shares issued and outstanding, actual; 200,000,000 shares authorized, 21,829,701 shares issued and outstanding, pro forma (unaudited); 200,000,000 shares authorized, 28,496,368 shares issued and outstanding, pro forma as adjusted (unaudited)

     1       2       3  

Additional paid-in capital

     10,666           101,784       191,583  

Accumulated other comprehensive income

                  

Accumulated deficit

     (121,190     (122,080     (122,080
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity (deficit)

     (110,523     (20,294     69,506  
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ (1,362   $ (1,353   $ 88,447  
  

 

 

   

 

 

   

 

 

 

 

(1)

Each $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share of common stock, would increase (decrease) the pro forma as adjusted amount of each of cash and cash equivalents, total stockholders’ equity (deficit) and total capitalization by approximately $6.2 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions. Similarly, each increase (decrease) of 1.0 million shares in the number of shares offered by us at the assumed initial public offering price per share would increase (decrease) the pro forma as adjusted amount of each of cash and cash equivalents, total stockholders’ equity (deficit) and total capitalization by approximately $14.0 million, assuming the assumed

 

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initial public offering price of $15.00 per share of common stock remains the same, and after deducting estimated underwriting discounts and commissions. The pro forma and pro forma as adjusted information discussed above is illustrative only and will change based on the actual initial public offering price and other terms of this offering determined at pricing.

The outstanding share information in the table above is based on 21,829,701 shares of our common stock (including shares of our redeemable convertible preferred stock on an as-converted basis, and assuming the exercise of a warrant to purchase 188,643 shares of our common stock) outstanding as of March 31, 2019, and excludes:

 

   

4,381,884 shares of our common stock issuable upon the exercise of options to purchase shares of our common stock granted under our 2011 Plan and outstanding as of March 31, 2019, with a weighted-average exercise price of $3.62 per share;

 

   

363,440 shares of our common stock issuable upon the exercise of options to purchase shares of our common stock granted under our 2011 Plan after March 31, 2019, with an exercise price of $13.20 per share;

 

   

84,585 shares of our redeemable convertible preferred stock issuable upon the exercise of warrants to purchase shares of our redeemable convertible preferred stock outstanding as of March 31, 2019, with a weighted-average exercise price of $7.13 per share;

 

   

65,502 shares of our common stock issuable upon the exercise of a warrant to purchase shares of our common stock outstanding as of March 31, 2019, with an exercise price of $9.16 per share;

 

   

7,440,524 shares of our common stock reserved for future issuance under our 2019 Plan, (including up to 5,440,524 shares of our common stock comprised of (i) the shares reserved and remaining available for issuance under our 2011 Plan that will be added to our 2019 Plan reserve upon its effectiveness plus (ii) the number of shares subject to stock options or other stock awards granted under our 2011 Plan that would have otherwise returned to our 2011 Plan, which will be added as they become available (e.g., due to forfeiture of the underlying 2011 Plan award) which includes an annual evergreen increase and will become effective in connection with this offering; and

 

   

250,000 shares of our common stock reserved for future issuance under our ESPP, which includes an annual evergreen increase and will become effective in connection with this offering.

 

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DILUTION

If you invest in our common stock in this offering, your ownership interest will be immediately diluted to the extent of the difference between the initial public offering price per share and the pro forma as adjusted net tangible book value per share of our common stock after this offering.

As of March 31, 2019, we had a pro forma net tangible book value (deficit) of $(20.3) million, or $(0.93) per share. Pro forma net tangible book value per share represents the amount of our total tangible assets less our total liabilities, divided by the number of shares of our common stock outstanding as of March 31, 2019, after giving effect to the automatic conversion of all shares of our redeemable convertible preferred stock outstanding as of March 31, 2019 into 18,474,742 shares of our common stock and assuming the exercise of a warrant to purchase 188,643 shares of our common stock.

After giving further effect to the sale of 6,666,667 shares of common stock that we are offering at the assumed initial public offering price of $15.00 per share, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of March 31, 2019 would have been approximately $69.5 million, or approximately $2.44 per share. This amount represents an immediate increase in pro forma net tangible book value of $3.37 per share to our existing stockholders and an immediate dilution in pro forma net tangible book value of approximately $12.56 per share to new investors purchasing shares of common stock in this offering.

Dilution per share to new investors is determined by subtracting pro forma as adjusted net tangible book value per share after this offering from the initial public offering price per share paid by new investors. The following table illustrates this dilution (without giving effect to any exercise by the underwriters of their over-allotment option):

 

Assumed initial public offering price per share

     $ 15.00  

Pro forma net tangible book value (deficit) per share as of March 31, 2019

   $ (0.93  

Increase in pro forma net tangible book value per share attributable to this offering

     3.37    
  

 

 

   

Pro forma as adjusted net tangible book value per share after this offering

       2.44  
    

 

 

 

Dilution per share to new investors in this offering

     $ 12.56  
    

 

 

 

Each $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share would increase (decrease) the pro forma as adjusted net tangible book value per share after this offering by approximately $0.22, and dilution in pro forma net tangible book value per share to new investors by approximately $0.78, assuming that the number of shares of common stock offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions. Each increase (decrease) of 1.0 million shares in the number of shares of common stock offered by us would increase (decrease) our pro forma as adjusted net tangible book value per share after this offering by approximately $0.39 per share and decrease (increase) the dilution to investors participating in this offering by approximately $0.39 per share, assuming that the assumed initial public offering price remains the same, and after deducting estimated underwriting discounts and commissions.

If the underwriters exercise their over-allotment option in full, the pro forma as adjusted net tangible book value after the offering would be $2.83 per share, the increase in pro forma net tangible book value per share to existing stockholders would be $3.76 per share and the dilution per share to new investors would be $12.17 per share, in each case assuming an initial public offering price of $15.00 per share.

The following table summarizes on the pro forma as adjusted basis described above, as of March 31, 2019, the differences between the number of shares of common stock purchased from us by our existing stockholders and common stock by new investors purchasing shares in this offering, the total consideration paid to us in cash

 

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and the average price per share paid by existing stockholders for shares of common stock issued prior to this offering and the price to be paid by new investors for shares of common stock in this offering. The calculation below is based on the assumed initial public offering price of $15.00 per share, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

     Shares Purchased     Total Consideration     Average
Price
Per
Share
 
   Number      Percent     Amount      Percent  

Existing stockholders

     21,829,701        76.6   $ 90,715,199        47.6   $ 4.16  

New investors

     6,666,667        23.4       100,000,005        52.4     $ 15.00  
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

     28,496,368        100   $ 190,715,204        100  
  

 

 

    

 

 

   

 

 

    

 

 

   

The outstanding share information in the table above is based on 21,829,701 shares of our common stock (including shares of our redeemable convertible preferred stock on an as-converted basis, and assuming the exercise of a warrant to purchase 188,643 shares of our common stock) outstanding as of March 31, 2019, and excludes:

 

   

4,381,884 shares of our common stock issuable upon the exercise of options to purchase shares of our common stock granted under our 2011 Plan and outstanding as of March 31, 2019, with a weighted-average exercise price of $3.62 per share;

 

   

363,440 shares of our common stock issuable upon the exercise of options to purchase shares of our common stock granted under our 2011 Plan after March 31, 2019, with an exercise price of $13.20 per share;

 

   

84,585 shares of our redeemable convertible preferred stock issuable upon the exercise of warrants to purchase shares of our redeemable convertible preferred stock outstanding as of March 31, 2019, with a weighted-average exercise price of $7.13 per share;

 

   

65,502 shares of our common stock issuable upon the exercise of a warrant to purchase shares of our common stock outstanding as of March 31, 2019, with an exercise price of $9.16 per share;

 

   

7,440,524 shares of our common stock reserved for future issuance under our 2019 Plan, (including up to 5,440,524 shares of our common stock comprised of (i) the shares reserved and remaining available for issuance under our 2011 Plan that will be added to our 2019 Plan reserve upon its effectiveness plus (ii) the number of shares subject to stock options or other stock awards granted) which includes an annual evergreen increase and will become effective in connection with this offering; and

 

   

250,000 shares of our common stock reserved for future issuance under our ESPP, which includes an annual evergreen increase and will become effective in connection with this offering.

To the extent any outstanding options are exercised, there will be further dilution to new investors. If all of such outstanding options had been exercised as of March 31, 2019, the pro forma as adjusted net tangible book value per share after this offering would be $2.60, and total dilution per share to new investors would be $12.40.

If the underwriters exercise their over-allotment option in full, our existing stockholders would own 74.0% and the investors purchasing shares of our common stock in this offering would own 26.0% of the total number of shares of our common stock outstanding immediately after closing of this offering.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

We derived the selected consolidated statements of operations data and consolidated balance sheets data for the fiscal years ended December 31, 2017 and 2018 from our audited consolidated financial statements included elsewhere in this prospectus. The summary consolidated statements of operations and comprehensive loss data for the three months ended March 31, 2018 and 2019 and the summary consolidated balance sheet data as of March 31, 2019 are derived from our unaudited interim condensed consolidated financial statements included elsewhere in this prospectus. We have prepared the unaudited interim condensed consolidated financial statements on the same basis as the audited financial statements and have included, in our opinion, all adjustments, consisting only of normal recurring adjustments that we consider necessary for a fair statement of the financial information set forth in those statements. The summary financial data included in this section are not intended to replace the financial statements and related notes included elsewhere in this prospectus. You should read the selected consolidated financial data set forth below in conjunction with our consolidated financial statements, the notes to our consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained elsewhere in this prospectus. Our historical results are not necessarily indicative of our future performance, and our interim results for the three months ended March 31, 2019 are not necessarily indicative of results to be expected for the full year ending December 31, 2019, or any other period.

 

     Year Ended December 31,     Three Months Ended
March 31,
 
     2017     2018     2018     2019  
                 (unaudited)  
    

(in thousands, except share and per share data)

 

Revenues

   $ 9,393     $ 37,774     $ 4,164     $ 14,075  

Costs and expenses

        

Costs of revenues(1)

     11,736       25,969       4,065       10,091  

Research and development(1)

     9,919       14,304       2,949       5,245  

Selling, general, and administrative(1)

     9,901       11,271       2,313       4,170  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     31,556       51,544       9,327       19,506  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (22,163     (13,770     (5,163     (5,431

Interest income

     100       293       61       84  

Interest expense

     (1,303     (1,894     (622     (184

Loss on debt extinguishment

           (4,658            

Other (expense) income, net

     (227     150       351       (152
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (23,593     (19,879     (5,373     (5,683
  

 

 

   

 

 

   

 

 

   

 

 

 

Provision for income taxes

     (5     (7     (2     (2
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (23,598   $ (19,886   $ (5,375   $ (5,685
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share, basic and diluted(2)

   $ (7.78   $ (6.49   $ (1.76   $ (1.84
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares outstanding, basic and diluted(2)

     3,031,636       3,063,157       3,051,581       3,091,342  
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share, basic and diluted (unaudited)(2)

     $ (0.95     $ (0.26
    

 

 

     

 

 

 

Pro forma weighted-average shares outstanding, basic and diluted (unaudited)(2)

       20,483,543         21,754,727  
    

 

 

     

 

 

 

 

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(1)

Includes stock-based compensation as follows:

 

     Year Ended December 31,      Three Months Ended March 31,  
         2017              2018                2018                  2019        
            (unaudited)  
     (in thousands)  

Costs of revenues

   $ 74      $ 177      $ 24      $ 85  

Research and development

     225        429        64        164  

Selling, general, and administrative

     454        711        81        360  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 753      $ 1,317      $ 169      $ 609  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(2)

See the consolidated statements of operations and Note 15 to our consolidated financial statements included elsewhere in this prospectus for an explanation of the method used to compute the historical and pro forma net loss per share and the number of shares used in the computation of the per share amounts.

 

     As of December 31,     As of March 31,  
     2017     2018     2018     2019  
                 (unaudited)  
     (in thousands)  

Consolidated Balance Sheet Data:

        

Cash and cash equivalents

   $ 22,617   $ 19,744   $ 21,844     $ 33,237  

Working capital(1)

     (22,262     (28,291     (29,162     (15,348

Total assets

     33,563       41,670       35,302       57,647  

Redeemable convertible preferred stock warrant liability

     292       683       292       817  

Additional paid-in capital

     3,025       9,131       3,220       10,666  

Accumulated deficit

     (95,619     (115,505     (100,995     (121,190

Total stockholders’ deficit

     (92,603     (106,388     (97,780     (110,523

 

(1)

Working capital is defined as total current assets less total current liabilities. See our consolidated financial statements and the related notes included elsewhere in this prospectus for further details regarding our current assets and current liabilities.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read together with our consolidated financial statements and accompanying notes included elsewhere within this prospectus. This discussion includes both historical information and forward-looking information that involves risk, uncertainties, and assumptions. Our actual results may differ materially from management’s expectations as a result of various factors, including, but not limited to, those discussed in the section titled “Risk Factors.”

Overview

We are a growing cancer genomics company transforming the development of next-generation therapies by providing more comprehensive molecular data about each patient’s cancer and immune response. We designed our NeXT Platform to adapt to the complex and evolving understanding of cancer, providing our biopharmaceutical customers with information on all of the approximately 20,000 human genes, together with the immune system, in contrast to many cancer panels that cover roughly 50 to 500 genes. We are also developing a complementary liquid biopsy assay that analyzes all human genes versus the more narrowly focused liquid biopsy assays that are currently available. By combining technological innovation, operational scale, and regulatory differentiation, our NeXT Platform is designed to help our customers obtain new insights into the mechanisms of response and resistance to therapy as well as new potential therapeutic targets. Our platform enhances the ability of biopharmaceutical companies to unlock the potential of conducting translational research in the clinic rather than with pre-clinical animal models or cancer cell lines. We are also planning to release a diagnostic based on our NeXT Platform that we envision being used initially by biopharmaceutical customers and clinical collaborators. Since inception, we have provided our services to more than 45 biopharmaceutical customers, including several of the largest pharmaceutical companies in the world.

We have focused on human genome sequencing since our inception in 2011. In 2013, we introduced our patented ACE Exome technology, providing enhanced and more complete coverage over all of the approximately 20,000 human genes. The superior performance of ACE Exome technology compared to other exomes was described in Genome Medicine and Nature Review publications.

In November 2016, we launched our ACE ImmunoID product, the first generation of our immuno-oncology genomics platform that combined our ACE exome and transcriptome technology with analytics to provide a more comprehensive tumor profiling solution for biopharma customers conducting cancer clinical trials and translational research. With ACE ImmunoID for Personalized Cancer Therapy, we further enhanced the platform for personalized cancer therapy customers with additional neoantigen analytics, improved turnaround times, and access to a Device Master File that we filed with the U.S. Food and Drug Administration. With the ACE ImmunoID for Biomarkers, we extended the platform further with ImmunogenomicsID, a broad immuno-genomics biomarker analysis engine. In November 2018, we announced ImmunoID NeXT, our universal cancer immunogenomics platform, which is the first technology to enable comprehensive analysis of both a tumor and its immune microenvironment from a single sample and provides utility across immuno-oncology, targeted, and personalized therapies. We expect to do a full commercial launch of ImmunoID NeXT in 2019.

In parallel with the work described above, we also developed multiple clinical diagnostic tests. Clinical diagnostic testing has remained a small portion of our business, primarily because we have elected not to expend the time and resources necessary to secure third-party reimbursement, choosing instead to pursue more immediate revenue opportunities. Nevertheless, it has helped us to develop important capabilities that do not depend on third-party reimbursement. In June 2015, we launched our ACE CancerPlus Test based on a 1,400-gene panel. We plan to build on this experience in 2019 by introducing a clinical diagnostic test based on our ImmunoID NeXT Platform, which will include all of the approximately 20,000 human genes and will be targeted initially to biopharmaceutical customers.

 

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In parallel with the development of our platform technology, we have also provided DNA sequencing and analysis services under contract with the U.S. Department of Veterans Affairs (the “VA”) Million Veteran Program (the “VA MVP”), beginning in 2012. This relationship with the VA MVP has enabled us to innovate, scale our operational infrastructure, and achieve greater efficiencies in our lab.

Our customers include large-cap pharmaceutical companies, emerging biotechnology companies, universities, non-profit medical research institutes, and government entities. We generated revenues of $9.4 million and $37.8 million for the years ended December 31, 2017 and 2018, respectively, and $4.2 million and $14.1 million for the three months ended March 31, 2018 and 2019, respectively. In 2018, 49% of our revenues were generated from VA MVP. Non-VA MVP revenues increased by 114% in 2018 compared to 2017. For the three months ended March 31, 2019, 59% of our revenues were generated from VA MVP. Non-VA MVP revenues increased by 162% in the three months ended March 31, 2019 compared to the three months ended March 31, 2018. Our top five customers represented 45% and 82% of revenues in 2017 and 2018, respectively, and 76% and 90% of revenues for the three months ended March 31, 2018 and 2019, respectively.

We also incurred net losses of $23.6 million and $19.9 million for the years ended December 31, 2017 and 2018, respectively, and net losses of $5.4 million and $5.7 million for the three months ended March 31, 2018 and 2019, respectively.

As of March 31, 2019, we had $33.2 million in cash and cash equivalents. From inception through March 31, 2019, we have funded our operations primarily through cash from operations, redeemable convertible preferred stock issuances, and debt issuances. After giving effect to the anticipated net proceeds from this offering, we expect that our existing cash and cash equivalents, anticipated cash flow from operations, and our $20.0 million financing facility will provide sufficient funds to sustain operations through at least the next 12 months. We have based these estimates on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect. See the section titled “Liquidity and Capital Resources; Plan of Operations.”

Factors Affecting Our Performance

We believe there are several important factors that have impacted and that we expect will impact our operating performance and results of operations, including:

 

   

The continued development of the market for genomic-based tests. Our performance depends on the willingness of biopharmaceutical customers to continue to seek more comprehensive molecular information to develop more efficacious cancer therapies.

 

   

Increasing adoption of our products and solutions by existing customers. Our performance depends on our ability to retain and broaden adoption with existing customers. Because our technology is novel, some customers begin using our platform by initiating pilot studies involving a small number of samples to gain experience with our service. As a result, historically a significant portion of our revenues has come from existing customers. We believe that our ability to convert initial pilots into larger orders from existing customers has the potential to drive substantial long-term revenue. We expect there may be some variation in the number of samples they choose to test each quarter.

 

   

Adoption of our products and solutions by new customers. While new customers initially may not account for significant revenues, we believe that they have the potential to grow substantially over the long term as they gain confidence in our service. Our ability to engage new customers is critical to our long-term success. Our publications, posters and presentations at scientific conferences lead to engagement at the scientific level with potential customers who often make the initial decision to gain experience with our platform. Accessing these new customers through scientific engagement and marketing to gain initial buy-in is critical to our success and gives us the opportunity to demonstrate the utility of our platform.

 

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Our revenues and costs are affected by the volume of samples we receive from customers from period to period. The timing and size of sample shipments received after orders have been placed is variable. Since sample shipments can be large, and are often received from a third party, the timing of arrival can be difficult to predict over the short term. Although our long-term performance is not affected, we do see quarter-to-quarter volatility due to these factors. Samples arriving later than expected may not be processed in the quarter proposed and result in revenue the following quarter. Since many of our customers request defined turnaround times, we employ project managers to coordinate and manage the complex process from sample receipt to sequencing and delivery of results. Our business can be seasonal, as we historically have received fewer samples during July and August.

 

   

Investment in product innovation to support commercial growth. Investment in research and development, including the development of new products is critical to establish and maintain our leading position. In particular, we have invested in NeoantigenID, a neoantigen characterization report, ImmunogenomicsID, a broad biomarker report, and ImmunoID NeXT, our universal cancer immunogenomics platform. We are also collaborating with investigators from academic cancer centers, such as Inova Health System, Stanford Medicine, and the Parker Institute for Cancer Immunotherapy, to support the utility of our platform. We believe this work is critical to gaining customer adoption and expect our investments in these efforts to increase. We believe utility for our product may result in additional expenditures to develop and market new products, including a diagnostic or database.

 

   

Leverage our operational infrastructure. We have invested significantly, and will continue to invest, in our sample processing capabilities and commercial infrastructure. With our current operating model and infrastructure, we can increase our production and commercialize new generations of our platform, but as our volumes continue to increase we will ultimately need to invest in additional production capabilities. We expect to grow our revenues and spread our costs over a larger volume of services. In addition, we may invest significant amounts in infrastructure to support new products resulting from our research and development activities.

Components of Operating Results

Revenues

We derive our revenues primarily from sequencing and data analysis services to support the development of next-generation cancer therapies. We support our customers by providing high-accuracy, validated genomic sequencing and advanced analytics. Many of these analytics are related to state-of-the-art biomarkers, including those relevant to immuno-oncology therapeutics such as checkpoint inhibitors.

Our revenues are primarily generated through contracts with companies in the pharmaceutical industry, healthcare organizations, and government entities. Our ability to increase our revenues will depend on our ability to further penetrate this market. To do this, we are developing a growing set of additional state-of-the-art products, advancing our operational infrastructure, building our regulatory credentials and expanding our targeted marketing efforts. Unlike diagnostic or therapeutic companies, we have not to date sought reimbursement through traditional healthcare payors. We sell through a small direct sales force.

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

 

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Revenues by customer type

Revenues by customer type were as follows:

 

     Year Ended December 31,      Three Months Ended March 31,  
     2017      2018      2018      2019  
     (in thousands)  

VA MVP

   $ 421      $ 18,601      $ 1,977      $ 8,343  

All other customers

     8,972        19,173        2,187        5,732  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 9,393      $ 37,774      $ 4,164      $ 14,075  
  

 

 

    

 

 

    

 

 

    

 

 

 

Revenues concentration

Our top five customers represented 45% and 82% of revenues in 2017 and 2018, respectively. Our top five customers represented 76% and 90% of revenues for the three months ended March 31, 2018 and 2019, respectively. Customers that accounted for equal to or greater than 10% of revenues in 2017 or 2018 and for the three months ended March 31, 2018 and 2019 were as follows:

 

     Year Ended December 31,     Three Months Ended March 31,  
     2017     2018     2018     2019  

VA MVP

     *       49     47     59

Merck & Co., Inc.

     11     12     12     *  

Pfizer Inc.

     *       10     *       17

Customer A

     13     *       *       *  

Customer B

     10     *       *       *  

 

*

Less than 10% of revenues.

Accounts receivable concentration

As of December 31, 2017 and 2018 and as of March 31, 2018 and 2019, customers that accounted for greater than 10% of accounts receivable were as follows:

 

     As of December 31,     As of March 31,  
     2017     2018     2018     2019  

Pfizer Inc.

     13     33     11     47

Customer A

     *       17     *       *  

Merck & Co., Inc.

     38     10     22     *  

Customer B

     *       10     *       *  

Customer C

     13     *       *       20

VA MVP

     *       *       38     *  

 

*

Less than 10% of accounts receivable.

Costs and Expenses

Costs of revenues

Costs of revenues consist of production material costs, personnel costs (salaries, bonuses, benefits, and stock-based compensation), costs of consumables, laboratory supplies, depreciation and service maintenance on capitalized equipment, and information technology (“IT”) and facility costs. We expect the costs of revenues to increase as our revenues grow, but the cost per unit of data delivered to decrease over time due to economies of scale we may gain as volume increases, automation initiatives, and other cost reductions.

 

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Research and development expenses

Research and development expenses consist of costs incurred for the development of our products. These expenses consist primarily of payroll and personnel costs (salaries, bonuses, benefits, and stock-based compensation), costs of consumables, laboratory supplies, depreciation and service maintenance on capitalized equipment, and IT and facility costs. These expenses also include costs associated with our collaborations, which we expect to increase over time.

We expense our research and development expenses in the period in which they are incurred. We expect to increase our research and development expenses as we continue to develop new products.

Selling, general, and administrative expenses

Selling expenses consist of personnel costs, customer support expenses, direct marketing expenses, educational and promotional expenses, and market research. Our general and administrative expenses include costs for our executive, accounting, finance, legal, and human resources functions. These expenses consist of personnel costs, audit and legal expenses, consulting costs, and IT and facility costs. We expense all selling, general, and administrative expenses as incurred.

We expect our selling expenses will continue to increase in absolute dollars, primarily driven by our efforts to expand our commercial capability and to expand our brand awareness and customer base through targeted marketing initiatives with an increased presence both within and outside the United States. We also expect general and administrative expenses will increase as we scale our operations. In addition, we expect to incur additional accounting, legal, director and officer insurance, and other expenses as a public company that we did not incur as a private company.

Interest Income

Interest income consists primarily of interest earned on our cash and cash equivalents.

Interest Expense

Interest expense primarily consists of cash and non-cash interest costs related to our term loan, convertible promissory notes, and revolving loan. We record costs incurred in connection with the issuance of debt as a direct deduction from the debt liability. We amortize these costs over the term of our debt agreements as interest expense in our consolidated statements of operations.

Loss on Debt Extinguishment

We incurred a loss on debt extinguishment in 2018 resulting from changes in the maturity dates of the convertible notes issued in 2017. See Note 6 to our consolidated financial statements included elsewhere in this prospectus.

Other Income (Expense), Net

Other income (expense), net consists of changes in the fair value of the compound derivative instrument, changes in fair value of convertible preferred stock warrant liability, and foreign currency exchange gains and losses. We expect our foreign currency gains and losses to continue to fluctuate in the future due to changes in foreign currency exchange rates.

 

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Results of Operations

Comparison of the Years Ended December 31, 2017 and 2018 and the Three Months Ended March 31, 2018 and 2019

The following table summarizes our results of operations for the periods indicated:

 

     Year Ended December 31,     Three Months Ended March 31,  
     2017     2018     2018     2019  
                 (unaudited)  
     (in thousands, except share and per share data)  

Revenues

   $ 9,393     $ 37,774     $ 4,164     $ 14,075  

Costs and expenses

        

Costs of revenues

     11,736       25,969       4,065       10,091  

Research and development

     9,919       14,304       2,949       5,245  

Selling, general, and administrative

     9,901       11,271       2,313       4,170  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     31,556       51,544       9,327       19,506  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (22,163     (13,770     (5,163     (5,431

Interest income

     100       293       61       84  

Interest expense

     (1,303     (1,894     (622     (184

Loss on debt extinguishment

           (4,658            

Other (expense) income, net

     (227     150       351       (152
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (23,593     (19,879     (5,373     (5,683
  

 

 

   

 

 

   

 

 

   

 

 

 

Provision for income taxes

     (5     (7     (2     (2
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $
 
 
(23,598
 
  $ (19,886   $ (5,375   $ (5,685
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share, basic and diluted

   $ (7.78   $ (6.49   $
(1.76

  $
(1.84

  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares outstanding, basic and diluted

     3,031,636       3,063,157       3,051,581       3,091,342  
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share, basic and diluted (unaudited)

     $ (0.95     $
(0.26

    

 

 

     

 

 

 

Pro forma weighted-average shares outstanding, basic and diluted (unaudited)

       20,483,543         21,754,727  
    

 

 

     

 

 

 

Revenues

Comparison of the Years Ended December 31, 2017 and 2018

Revenues were $9.4 million for the year ended December 31, 2017 compared to $37.8 million for the year ended December 31, 2018, an increase of $28.4 million, or 302%. This increase in revenues was primarily due to an increase in the volume of samples we tested in relation to the sequencing and data analysis services we provided to our customers. The increase in samples tested was primarily due to additional volume from both existing and new customers, including an increase in the number of projects per customer. For the year ended December 31, 2018, revenues from existing customers and existing projects accounted for 58% of total revenues, and the remaining 42% of revenues was generated from new projects from our existing customers and new customers acquired in 2018.

 

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Comparison of the Three Months Ended March 31, 2018 and 2019

Revenues were $4.2 million for the three months ended March 31, 2018 compared to $14.1 million for the three months ended March 31, 2019, an increase of $9.9 million, or 236%. This increase in revenues was primarily due to an increase in the volume of samples we tested in relation to the sequencing and data analysis services we provided to our customers. The increase in samples tested was primarily due to additional volume from both existing and new customers, including an increase in the number of projects per customer. For the three months ended March 31, 2019, revenues from existing customers and existing projects accounted for 10% of total revenues, and the remaining 90% of revenues was generated from new projects from our existing customers and new customers acquired in 2018 and 2019.

Costs of Revenues

Comparison of the Years Ended December 31, 2017 and 2018

Costs of revenues were $11.7 million for the year ended December 31, 2017 compared to $26.0 million for the year ended December 31, 2018, an increase of $14.3 million, or 121%. This increase was primarily due to the increase in revenues discussed above. The cost components related to the increase in costs of revenues were an increase in production materials of $9.6 million, an increase in depreciation and service maintenance on capitalized equipment of $2.0 million, an increase in expensed equipment, consumables, and laboratory supplies of $1.2 million, an increase related to personnel costs including salaries, bonuses, benefits, and stock-based compensation expenses of $1.0 million, and an increase in IT and facility costs of $0.5 million.

Comparison of the Three Months Ended March 31, 2018 and 2019

Costs of revenues were $4.1 million for the three months ended March 31, 2018 compared to $10.1 million for the three months ended March 31, 2019, an increase of $6.0 million, or 146%. This increase was primarily due to the increase in revenues discussed above. The cost components related to the increase in costs of revenues were an increase in production materials of $3.7 million, an increase related to personnel costs including salaries, bonuses, benefits, and stock-based compensation expenses of $1.1 million, an increase in depreciation and service maintenance on capitalized equipment of $0.6 million, an increase in the consumption cost of expensed equipment, consumables, and laboratory supplies of $0.4 million, and an increase in IT and facility costs of $0.2 million.

Research and Development Expenses

Comparison of the Years Ended December 31, 2017 and 2018

Research and development expenses were $9.9 million for the year ended December 31, 2017 compared to $14.3 million for the year ended December 31, 2018, an increase of $4.4 million, or 44%. This was primarily due to increased development activities for new product offerings, lab and automation development costs, and IT and facility costs. Research and development expenses increased due to an increase of $2.3 million in personnel-related expenses, including salaries, bonuses, benefits, and stock-based compensation expenses, a $1.1 million increase in IT and facility costs, a $0.8 million increase in laboratory and automation supplies consumed and equipment, and a $0.2 million increase in other costs.

Comparison of the Three Months Ended March 31, 2018 and 2019

Research and development expenses were $2.9 million for the three months ended March 31, 2018 compared to $5.2 million for the three months ended March 31, 2019, an increase of $2.3 million, or 79%. This was primarily due to increased development activities for new product offerings, lab and automation development costs, and IT and facility costs. Research and development expenses increased due to an increase of

 

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$0.9 million in personnel-related expenses, including salaries, bonuses, benefits, and stock-based compensation expenses, a $0.9 million increase in laboratory and automation supplies consumed and equipment, a $0.3 million increase in depreciation and service maintenance on capitalized equipment and a $0.2 million increase in IT and facility costs.

Selling, General, and Administrative Expenses

Comparison of the Years Ended December 31, 2017 and 2018

Selling, general, and administrative expenses were $9.9 million for the year ended December 31, 2017 compared to $11.3 million for the year ended December 31, 2018, an increase of $1.4 million, or 14%. Selling, general, and administrative expenses increased due to a $1.0 million increase in personnel-related expenses including salaries, bonuses, benefits, and stock-based compensation expenses, a $0.2 million increase in professional services, and a $0.2 million increase in other costs.

Comparison of the Three Months Ended March 31, 2018 and 2019

Selling, general, and administrative expenses were $2.3 million for the three months ended March 31, 2018 compared to $4.2 million for the three months ended March 31, 2019, an increase of $1.9 million, or 83%. Selling, general, and administrative expenses increased due to a $1.3 million increase in personnel-related expenses including salaries, bonuses, benefits, and stock-based compensation expenses, a $0.5 million increase in professional services, and a $0.1 million increase in other costs.

Other Income (Expenses), Net

 

     Year Ended
December 31,
    Change     Three Months
Ended

March 31,
     Change  
     2017     2018     $     2018     2019      $  
     (in thousands)  
                             (unaudited)         

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

   $ (64   $ (391   $ (327   $     —     $ 134      $ 134  

Changes in fair value of the compound derivative instrument

     (162     574       736       353              (353

Other

     (1     (33     (32     (2     18        20  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total other (expenses) income, net

   $ (227   $   150     $ 377     $ 351     $   152      $ (199
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Comparison of the Years Ended December 31, 2017 and 2018

We had other expense, net of $0.2 million for the year ended December 31, 2017, compared to other income, net of $0.2 million for the year ended December 31, 2018, an increase of approximately $0.4 million, or 166.1%. This increase was driven by a decrease in the fair value of a compound derivative instrument of approximately $0.7 million in 2018, partially offset by an increase in the fair values of warrants for Series B and Series C redeemable convertible preferred stock of approximately $0.3 million.

Comparison of the Three Months Ended March 31, 2018 and 2019

We had other income, net of $0.4 million for the three months ended March 31, 2018, compared to other income, net of $0.2 million for the three months ended March 31, 2019. The decrease was primarily driven by a $0.4 million decrease in fair value of the compound derivative instrument partially offset by a $0.1 million increase in the fair values of warrants for Series B and Series C redeemable convertible preferred stock.

 

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Liquidity and Capital Resources; Plan of Operations

Sources of Liquidity

From our inception through March 31, 2019, we have funded our operations primarily from $89.6 million from issuance of redeemable convertible preferred stock, as well as cash from operations and debt financing. In the year ended December 31, 2017, we received $12.2 million in gross cash proceeds from the issuance of convertible notes, and $5.0 million in gross cash proceeds from a revolving loan. On March 22, 2019, we received $20.0 million in gross cash proceeds from a growth capital loan. As of March 31, 2019, we had cash and cash equivalents in the amount of $33.2 million.

Future Funding Requirements

We have incurred net losses since our inception. For the years ended December 31, 2017 and 2018, we had net losses as of $23.6 million and $19.9 million, respectively, and for the three months ended March 31, 2018 and 2019, we had net losses of $5.4 million and $5.7 million, respectively, and we expect to incur additional losses in future periods. As of March 31, 2019, we had an accumulated deficit of $121.2 million. We believe that our existing cash, cash investments and anticipated cash flow from operations will provide sufficient funds to sustain operations through at least the next 12 months. See Note 16 to our audited consolidated financial statements included elsewhere in this prospectus.

We have based these future funding requirements on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect. If our available cash balances, net proceeds from this offering and anticipated cash flow from operations are insufficient to satisfy our liquidity requirements including because of lower demand for our services or other risks described in this prospectus, we may seek to sell additional common or preferred equity or convertible debt securities, enter into an additional credit facility or another form of third-party funding or seek other debt financing. The sale of equity and convertible debt securities may result in dilution to our stockholders and, in the case of preferred equity securities or convertible debt, those securities could provide for rights, preferences or privileges senior to those of our common stock. The terms of debt securities issued or borrowings pursuant to a credit agreement could impose significant restrictions on our operations. Additional capital may not be available on reasonable terms, or at all.

The expected use of the net proceeds from this offering represents our intentions based upon our current plans and business conditions. However, we have based these estimates on assumptions that may prove to be wrong, and we could use our capital resources sooner than we expect.

Term Loan

In September 2014, we entered into a loan and security agreement with a bank (the “Term Loan”), to borrow up to $3.0 million under an equipment loan secured by the equipment financed. On October 3, 2014, we borrowed $2.4 million under this loan agreement. The Term Loan required 12 interest-only payments, followed by 36 equal monthly installments of principal, plus interest, which began on October 3, 2015.

In connection with the Term Loan, we issued a 10-year warrant to purchase 22,489 shares of our Series B redeemable convertible preferred stock at an exercise price of $4.60 per share.

On September 30, 2018, the Term Loan was repaid in full.

Revolving Loan

In June 2017, we entered into a $10.0 million revolving loan and security agreement (the “Revolving Loan”) with TriplePoint Capital LLC (“TriplePoint”). Borrowings under the Revolving Loan had an interest rate of

 

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prime, plus 6.75%. The Revolving Loan also had a 5.5% end of term loan payment on the highest outstanding principal amount. The Revolving Loan required monthly interest-only payments until the maturity date. The Revolving Loan’s original maturity date was December 31, 2018 and in December 2018 the maturity date was further extended until March 22, 2019. See Note 16 to our consolidated financial statements included elsewhere in this prospectus. The maturity date of the extension of the Revolving Loan was not deemed substantial therefore we accounted for the transaction as a debt modification.

As of both December 31, 2017 and 2018, our outstanding principal under the Revolving Loan was $5.0 million and $5.0 million was available to borrow.

In connection with the Revolving Loan, we issued a warrant to purchase up to 62,096 shares of our Series C redeemable convertible preferred stock at an exercise price of $8.052 per share. See Note 5 to our consolidated financial statements included elsewhere in this prospectus.

The Revolving Loan had an effective interest rate of 19.22% per year. The Revolving Loan interest expenses for the years ended December 31, 2017 and 2018 were $0.4 million and $0.9 million, respectively.

In March 2019, we entered into an amendment to the Revolving Loan with TriplePoint that provided for a $20.0 million growth capital loan facility (the “Growth Capital Loan”). In March 2019, we used $5.3 million of the Growth Capital Loan to repay all amounts owing in respect of the Revolving Loan.

Growth Capital Loan

On March 22, 2019, we entered into the Growth Capital Loan with TriplePoint to provide for a $20.0 million growth capital loan facility and as of March 31, 2019, had drawn down the full $20.0 million available under the facility. We used $5.3 million of the Growth Capital Loan to repay, in its entirety, all amounts outstanding under the Revolving Loan. Borrowings under the Growth Capital Loan bear interest at a floating rate of prime rate plus 5.00% for borrowings up to $15.0 million and the prime rate plus 6.50% for borrowing greater than $15.0 million; provided, however, that in an event of default, as defined in the loan and security agreement, the interest rate applicable to borrowings under such agreement will be increased by 5.0%. Under the agreement, we are required to make monthly interest-only payments through April 1, 2020 and are required to make 36 equal monthly payments of principal, plus accrued interest, from April 1, 2020 through March 1, 2023, when all unpaid principal and interest becomes due and payable. We may voluntarily prepay all, but not part, of the outstanding principal at any time prior to the maturity date, subject to a prepayment fee of 1% of the outstanding balance, if prepaid in months one through 12 of the loan term. If prepaid after month 12 of the loan term of any growth capital loan, no additional prepayment premium shall be due. In addition to the final payment, we will pay an amount equal to 2.75% of each principal amount drawn under this growth capital loan facility. In connection with the Growth Capital Loan, we issued a warrant to purchase 65,502 shares of common stock to the lender at an exercise price of $9.16 per share. We recorded the issuance-date fair value of the warrant of $0.6 million and fees paid to the lender of $0.3 million as a debt discount which is amortized over the term of the Growth Capital Loan using the effective interest rate method.

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

Convertible Notes

On June 29, 2017, we entered into a convertible promissory note agreements (the “Convertible Notes”) with certain existing redeemable convertible preferred stockholders and third parties (the “Investors”) for the issuance of convertible promissory notes with a face value of $12.2 million. Under the terms of the Convertible Notes agreement, the Convertible Notes bear interest of 8% per annum, with a maturity date of June 28, 2018. In the event that we issued and sold shares of its equity securities (the “Equity Securities”) to Investors on or before the maturity date in an equity financing with total proceeds to us of not less than $10 million (including the

 

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conversion of the Convertible Notes or other convertible securities issued for capital raising purposes) (a “Qualified Financing”), then the outstanding principal amount of the Convertible Notes and any unpaid accrued interest would have automatically converted in whole without any further action by the holder into such Equity Securities sold in the Qualified Financing at a conversion price equal to the price paid per share for Equity Securities by the Investors in the Qualified Financing multiplied by 0.8. If we consummated a change of control while the Convertible Notes remained outstanding, we would have repaid the holders in cash an amount equal to 150% of the outstanding principal amount of the Convertible Notes, plus any unpaid accrued interest on the original principal. The Convertible Notes had customary events of default.

The conversion options of the Convertible Notes did not meet the requirements for separate accounting as an embedded derivative. However, the redemption features of the Convertible Notes met the requirements for separate accounting and were accounted for as a single, compound derivative instrument (see Note 9). The compound derivative instrument was recorded at fair value at inception and was subject to remeasurement to fair value at each consolidated balance sheet date, with any changes in fair value recognized in the consolidated statements of operations. The estimated fair value of the compound derivative instrument at issuance was recorded as a reduction in the carrying value of the Convertible Notes and as a single compound derivative liability. The Convertible Notes carrying value reduction was accreted using the effective interest method as interest expense over the Convertible Notes contractual period of one year. The Convertible Notes had an effective interest rate of 12.69% per year.

On May 31, 2018, the original maturity date for the Convertible Notes was extended to June 28, 2019 (previously June 28, 2018). The maturity date extension was deemed substantial and was accounted for as a debt extinguishment under Accounting Standards Codification (“ASC”) Topic 470, Debt. In connection with the debt extinguishment on May 31, 2018, the fair value of the Convertible Notes was allocated between the carrying amount of the Convertible Notes and accrued interested of $13.1 million, a compound derivative asset of $0.6 million, and an equity component of $3.9 million, which was credited to additional paid-in capital within the consolidated statements of redeemable convertible preferred stock and stockholders’ deficit. The transaction also resulted in a $3.3 million loss recorded as debt extinguishment in the accompanying consolidated statements of operations. The new carrying value of the Convertible Notes was accreted using the effective interest method as interest expense over the new contractual period of 1.1 years.

On August 20, 2018, the maturity date for the Convertible Notes was changed to September 20, 2018 (previously June 28, 2019). The term change was deemed substantial and was accounted for as a debt extinguishment under ASC Topic 470. In connection with the debt extinguishment on August 20, 2018, the fair value of the Convertible Notes was allocated between the new carrying amount of the Convertible Notes and accrued interest of $13.4 million, and an equity component of $0.8 million, which resulted in an additional credit to additional paid-in capital. The transaction also resulted in a $0.8 million loss recorded as debt extinguishment in the accompanying consolidated statements of operations. The new carrying value of the Convertible Notes was accreted using the effective interest method as interest expense over the new contractual period of one month.

On September 20, 2018, upon the maturity of the Convertible Notes, the carrying amount, including accrued interest of $13.4 million was converted into 1,667,997 shares of our Series C redeemable convertible preferred stock at a conversion price equal to $8.052 per share. No gain or loss was recorded on the conversion.

The interest expense on the Convertible Notes for the years ended December 31, 2017 and 2018, was $0.7 million and $0.9 million, respectively.

 

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Summary Consolidated Statements of Cash Flows

The following table sets forth the primary sources and uses of cash and cash equivalents for each of the periods presented below:

 

     Year Ended December 31,     Three Months Ended March 31,  
     2017     2018     2018     2019  
                 (unaudited)  
     (in thousands)  

Net cash provided by operating activities

   $ 290     $ 5,572     $ 723     $ 66  

Net cash used in investing activities

     (5,158     (7,852     (1,309     (960

Net cash provided by (used in) financing activities

     16,404       (591     (189     14,386  

Net Cash Provided by Operating Activities

Net cash provided by operating activities during the year ended December 31, 2017 was $0.3 million, which resulted from a net loss of $23.6 million, offset by non-cash charges of $3.1 million and net change in our operating assets and liabilities of $20.8 million. Non-cash charges primarily consisted of $1.2 million of depreciation and amortization expense, $0.8 million of stock-based compensation expense, and $1.2 million of non-cash interest expense, change in fair value of compound derivative instrument and convertible preferred stock warrant liability. The net change in our operating assets and liabilities was primarily the result of a $19.1 million increase in customer deposits related to customer prepayments, a $3.3 million increase in accounts payable and accrued liabilities to support inventory and general expenses, partially offset by a $1.2 million increase in accounts receivables related to increases in revenue, a $0.5 million increase in inventory and deferred cost balances, and a decrease of $0.2 million in prepaid expense and other assets.

Net cash provided by operating activities during the year ended December 31, 2018 was $5.6 million, which resulted from a net loss of $19.9 million, offset by non-cash charges of $10.0 million and net change in our operating assets and liabilities of $15.4 million. Non-cash charges primarily consisted of $4.7 million of loss of debt extinguishment, $3.1 million of depreciation and amortization expense, $1.3 million of stock-based compensation expense, and $1.2 million of accretion of noncash interest, partially offset by $0.2 million of change in fair value of compound derivative instrument and convertible preferred stock warrant liability. The net change in our operating assets and liabilities was primarily the result of a $18.2 million increase in customer deposits related to customer prepayments, a $3.2 million increase in accounts payable and accrued liabilities to support inventory, and general expenses, partially offset by a $2.5 million increase in accounts receivables related to increases in revenue, a $2.1 million increase in inventory and deferred cost balances, and a $1.3 million decrease in prepaid expense and other assets.

Net cash provided by operating activities during the three months ended March 31, 2018 was $0.7 million, which resulted from a net loss of $5.4 million, offset by non-cash charges of $0.7 million and net change in our operating assets and liabilities of $5.3 million. Non-cash charges primarily consisted of $0.5 million of depreciation and amortization expense, $0.2 million of stock-based compensation expense, and $0.5 million of accretion of noncash interest, partially offset by $0.4 million of change in fair value of compound derivative instrument and convertible preferred stock warrant liability. The net change in our operating assets and liabilities was primarily the result of a $6.3 million increase in customer deposits related to customer prepayments, a $0.2 million decrease in accounts payable and accrued liabilities to support inventory, and general expenses, partially offset by a $0.2 million increase in accounts receivables related to increases in revenue, and a $1.0 million decrease in inventory and other deferred cost balances.

Net cash provided by operating activities during the three months ended March 31, 2019 was $0.1 million, which resulted from a net loss of $5.7 million, offset by non-cash charges of $2.0 million and net change in our

 

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operating assets and liabilities of $3.7 million. Non-cash charges primarily consisted of $1.0 million of depreciation and amortization expense, $0.6 million of stock-based compensation expense, $0.2 million of change in fair value of convertible preferred stock warrant liability and change in accretion of noncash interest and debt reduction and $0.2 million of change in noncash lease expense. The net change in our operating assets and liabilities was primarily the result of a $1.4 million increase in customer deposits related to customer prepayments, a $0.8 million increase in accounts payable and accrued liabilities to support inventory, and general expenses, partially offset by a $1.3 million increase in accounts receivables related to increase in revenues, a $0.6 million increase in inventory and other deferred cost balances, and a $0.4 million decrease in prepaid expense and other assets.

Net Cash Used in Investing Activities

Net cash used in investing activities for 2017 was $5.2 million, which was primary related to the acquisition of property and equipment used for our sequencing and data analysis services.

Net cash used in investing activities for 2018 was $7.9 million, which was primary related to the acquisition of property and equipment used for our sequencing and data analysis services and facility expansion to support expanded operations.

Net cash used in investing activities for the three months ended March 31, 2018 was $1.3 million, which was primary related to the acquisition of property and equipment used for our sequencing and data analysis services and facility expansion to support expanded operations.

Net cash used in investing activities for the three months ended March 31, 2019 was $1.0 million, which was primary related to the acquisition of property and equipment used for our sequencing and data analysis services and facility expansion to support expanded operations.

Net Cash Provided by (Used in) Financing Activities

Net cash provided by financing activities was $16.4 million for the year ended December 31, 2017, which primarily consisted of $5.0 million borrowings under the Revolving Loan and $12.2 million from the Convertible Notes, partially offset by $0.8 million in debt repayment.

Net cash used in financing activities was $0.6 million for the year ended December 31, 2018, which primarily consisted of debt repayment.

Net cash used in financing activities was $0.2 million for the three months ended March 31, 2018, which primarily consisted of debt repayment.

Net cash provided by financing activities was $14.4 million for the three months ended March 31, 2019, which primarily consisted of $20.0 million borrowings under the Growth Capital Loan and $0.4 million from proceeds of exercise of stock options, partially offset by $5.0 million in debt repayment, $0.5 million in debt issuance costs, and $0.5 million in payment costs related to our initial public offering.

 

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Contractual Obligations and Commitments

The following table summarizes our non-cancelable contractual obligations and commitments as of December 31, 2018:

 

     Payments Due by Period  
     Less than
1 year
     1 to 3 years      3 to 5 years      More than
5 years
     Total  
     (in thousands)  

Debt obligations(1)

   $ 5,270      $      $      $      $ 5,270  

Operating lease obligations(2)

     1,091        1,030                      2,121  

Purchase obligation(3)

     17,073                             17,073  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $         23,434      $           1,030      $               —      $               —      $         24,464  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

In June 2017, we entered into the Revolving Loan. Amount reflects the contractually required principal and interest payments. See Note 6 to our consolidated financial statements included elsewhere in this prospectus.

(2)

We lease our facility under a non-cancelable operating lease. In February 2015, we entered into a lease for our current laboratory and office space that commenced in May 2015 and expires in November 2020. The minimum lease payments above do not include any related common area maintenance charges or real estate taxes. In November 2020, we may extend the lease at the then-current market rates.

(3)

On November 22, 2017, we entered into a pricing agreement with Illumina to purchase certain consumables and equipment. As of December 31, 2018, in accordance with the contract, we had a purchase commitment of $17.1 million by June 30, 2019. On March 26, 2019, we entered into a new pricing agreement with this vendor, which replaced in its entirety the agreement dated November 22, 2017. The new pricing agreement has a commitment to purchase $1.7 million of equipment by June 30, 2019.

The contractual commitment amounts in the table above are associated with agreements that are enforceable and legally binding. Obligations under contracts that we can cancel without a significant penalty are not included in the table above.

We received $20.0 million in gross proceeds from the issuance of the Growth Capital Loan in March 2019, which is not included in the above table. Interest on the unpaid principal balance of the Growth Capital Loan accrues from the date of issuance, and compounds monthly at the effective rate of 15.23% per year.

The amounts in the table above do not include approximately $42.9 million and $44.3 million in customer deposits as of December 31, 2018 and March 31, 2019, respectively. These amounts included $37.3 million and $39.6 million from one customer as of December 31, 2018 and March 31, 2019, respectively, that we may be required to refund under certain circumstances. While customers have not historically required us to return prepaid amounts, if a customer that has prepaid us for future services cancels its contract with us or reduces the level of services that it expects to receive, we would generally be required to repay that customer’s deposit with little or no notice. Because the requirement to return any deposits and the timing of any such repayments is uncertain, they have been excluded from the table above. If required to refund a deposit, we may not have the cash or other available resources to satisfy these repayment obligations. Even if we are able to satisfy the repayment obligation from available resources (including potentially a portion of the net proceeds of this offering), we may need to seek additional sources of capital to fund our operations which funding may not be available when needed or on acceptable terms. In either of those circumstances, our business, financial condition, results of operations, and reputation would be materially and adversely affected.

Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Sensitivity

The market risk inherent in our financial instruments and in our financial position represents the potential loss arising from adverse changes in interest rates or exchange rates.

 

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As of December 31, 2017 and 2018 and March 31, 2019, we had cash and cash equivalents of $22.6 million, $19.7 million and $33.2 million, respectively, consisting of cash held in bank accounts and money market funds denominated in U.S. dollars. A 100 basis point change in interest rates would not have a material effect on the fair market value of our cash and cash equivalents.

As of December 31, 2018, we are also exposed to market risk from changes in interest rates as a result of our indebtedness under the Revolving Loan, which matures on March 31, 2019. At December 31, 2017 and 2018, we had $5.0 million principal amount outstanding under the Revolving Loan. The interest rate associated with the Revolving Loan is the prime lending rate plus 6.75%. An immediate 100 basis point change in the prime interest rate would not result in a material impact on our results of operations for 2017 and 2018. See Note 6 to our consolidated financial statements for further description of the Revolving Loan.

We are also exposed to market risk from changes in interest rates as a result of our indebtedness under the Growth Capital Loan. At March 31, 2019, we had $20.0 million principal amount outstanding under the Growth Capital Loan. Borrowings under the Growth Capital Loan bear interest at a floating rate per annum equal to the prime rate plus 5.00% for borrowings up to $15.0 million and the prime rate plus 6.50% for borrowing greater than $15.0 million. An immediate 100 basis point change in the prime interest rate would not result in a material impact on our results of operations for the three months ended March 31, 2019. See Note 6 to our consolidated financial statements for further description of the Growth Capital Loan.

Foreign Currency Risk

The majority of our revenues is generated in the United States. As of December 31, 2017 and 2018 and March 31, 2018 and 2019, we had generated an insignificant amount of revenues denominated in foreign currencies. As we expand our presence in the international market, our results of operations and cash flows are expected to increasingly be subject to fluctuations due to changes in foreign currency exchange rates and may be adversely affected in the future due to changes in foreign exchange rates.

Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.

While our significant accounting policies are described in the notes to our consolidated financial statements, we believe that the following critical accounting policies are most important to understanding and evaluating our reported financial results.

Revenue Recognition

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

On January 1, 2017, we early adopted the new accounting standard ASC Topic 606 using the full retrospective method. Results for reporting periods beginning after January 1, 2017, are presented under ASC Topic 606. The impact of adopting ASC Topic 606 was not material on our consolidated financial statements.

 

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Revenue Recognition

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

Upon adoption of ASC Topic 606, we have evaluated the performance obligations contained in contracts with customers to determine whether any of the performance obligations are distinct, such that the customers can benefit from the obligations on their own, and whether the obligations can be separately identifiable from other obligations in the contract. For all of our contracts to date, the customer orders a specified quantity of a sequencing; therefore, the delivery of the ordered quantity per the purchase order is accounted for as one performance obligation. Our contracts include only one performance obligation—the delivery of the sequencing and data analysis services to the customer.

Fees for our sequencing and data analysis services are predominantly based on a fixed price per sample. The fixed prices identified in the arrangements only change if a pricing amendment is agreed with a customer. In limited cases we provide our customers a discount if samples received are above a certain volume are purchased. In such cases, the discount applies prospectively. We have analyzed such discounts if they represent a material right provided to a customer. We have concluded that such discounts do not represent a material right provided to a customer since they are not deemed to be incremental to the pricing offered to the customer, or are not enforceable options to acquire additional goods. As a result, these discounts do not constitute a material right and do not meet the definition of a separate performance obligation. We do not offer retrospective discounts or rebates. Accordingly, all of the transaction price, net of any discounts, is allocated to one performance obligation. Therefore, upon delivery of the services, there are no remaining performance obligations.

Contracts that contain multiple distinct performance obligations would require an allocation of the transaction price to each performance obligation based on a relative stand-alone selling price basis. Sometimes we deliver sequencing results in two or more batches; however, since the quantity delivered per batch of each individual test per sales order in these instances is in the same ratio as in the original sales order, allocating the transaction price on the a relative stand-alone selling price basis would have no impact on the revenue recognized in any period presented.

We recognize revenue when control of the promised services is transferred to our customers. Management applies judgment in evaluating when a customer obtains control of the promised service, which is when the sequencing and data analysis service results are delivered to customers, at an amount that reflects the consideration to which we expect to be entitled to in exchange for those services. Revenue is recorded net of sales or other transaction taxes collected from clients and remitted to taxing authorities.

A customer contract liability will arise when we have received payments from its customers in advance, but has not yet provided genome and exome sequencing and data analysis services to a customer and satisfied its performance obligations. We record a customer contract liability for performance obligations outstanding related to payments received in advance for customer deposits. We expect to satisfy these remaining performance obligations and recognize the related revenues upon providing sequencing and data analysis services.

All of our revenues and trade receivables are generated from contracts with customers and substantially all of our revenues are derived from U.S. domestic operations. The following section describes the accounting policies that we believe have significant judgment, or changes in judgment, as a result of adopting ASC Topic 606.

Payment Terms

Payment terms and conditions vary by contract and customer. Our standard payment terms are typically less than 90 days from the date of invoice. In instances where the timing of our revenue recognition differs from the

 

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timing of its invoicing, we have determined that our contracts do not include a significant financing component. The primary purposes of our invoicing terms are to provide customers with simplified and predictable ways of purchasing our services and provide payment protection for us.

Redeemable Convertible Preferred Stock

We record all shares of redeemable convertible preferred stock at their respective fair values on the dates of issuance, net of issuance costs. In the event of our voluntary or involuntary, liquidation, dissolution, or winding up, or a liquidation event such as a merger, acquisition and sale of all or substantially all of our assets, each of which we refer to as a deemed liquidation event, proceeds will be distributed in accordance with the liquidation preferences set forth in the amended and restated certificate of incorporation unless the holders of redeemable convertible preferred stock have converted their redeemable convertible preferred shares into common stock. Therefore, the redeemable convertible preferred stock is classified outside of permanent equity on the consolidated balance sheets as events triggering the liquidation preferences are not solely within our control. We have not adjusted the carrying values of the redeemable convertible preferred stock to the liquidation preferences of such shares because it is uncertain whether or when an event would occur that would obligate us to pay the liquidation preferences to holders of shares of redeemable convertible preferred stock. Subsequent adjustments to the carrying values to the liquidation preferences will be made only when it becomes probable that such a liquidation event will occur.

Convertible Preferred Stock Warrants

We account for warrants to purchase shares of our redeemable convertible preferred stock as liabilities at their estimated fair value because these warrants may obligate us to transfer assets to the holders at a future date upon a deemed liquidation event. The warrants are recorded at fair value upon issuance and are subject to remeasurement to fair value at each period end, with any fair value adjustments recognized in the consolidated statements of operations and comprehensive loss. We will continue to adjust the warrant liability for changes in fair value until the earlier of the exercise or expiration of the convertible preferred stock warrants, the completion of a deemed liquidation event, or the conversion of redeemable convertible preferred stock into common stock, or until holders of the redeemable convertible preferred stock can no longer trigger a deemed liquidation event. In connection with this offering, the convertible preferred stock warrants will be automatically converted into warrants to purchase shares of our common stock.

Common Stock Warrants

Our common stock warrants are classified as equity as they meet all criteria for equity classification. The common stock warrants are recorded at fair value upon issuance as additional paid-in-capital in the consolidated balance sheets. The common stock warrants are not remeasured after the issuance date. In connection with an initial public offering, the common stock warrants will remain outstanding unless voluntarily exercised by the holder.

Convertible Instruments

We evaluate and account for conversion options embedded in convertible instruments in accordance with ASC Topic 815, Derivatives and Hedging Activities. Applicable GAAP requires companies to bifurcate conversion options from their host instruments and account for them as freestanding derivative financial instruments according to certain criteria. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not remeasured at fair value under other GAAP with changes in fair value reported in earnings as they occur, and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.

 

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Stock-Based Compensation

We account for stock-based compensation arrangements with employees, using a fair value-based method, for costs related to all stock-based payments including stock options and stock awards. Our determination of the fair value of stock options on the date of grant utilizes the Black-Scholes option-pricing model.

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

Estimating the fair value of equity-settled awards as of the grant date using valuation models, such as the Black-Scholes option-pricing model, is affected by assumptions regarding a number of complex variables. Changes in the assumptions can materially affect the fair value and ultimately how much stock-based compensation expense is recognized. These inputs are subjective and generally require significant analysis and judgment to develop.

 

   

Expected Term—The expected term assumption represents the weighted-average period that the stock-based awards are expected to be outstanding. We have elected to use the “simplified method” for estimating the expected term of the options, whereby the expected term equals the arithmetic average of the vesting term and the original contractual term of the option.

 

   

Expected Volatility—For all stock options granted to date, the volatility data was estimated based on a study of publicly traded industry peer companies. For purposes of identifying these peer companies, we considered the industry, stage of development, size, and financial leverage of potential comparable companies.

 

   

Expected Dividend—The Black-Scholes option-pricing valuation model calls for a single expected dividend yield as an input. We currently have no history or expectation of paying cash dividends on its common stock.

 

   

Risk-Free Interest Rate—The risk-free interest rate is based on the yield available on U.S. Treasury zero-coupon issues similar in duration to the expected term of the equity-settled award.

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

Common Stock Valuations

The estimated fair value of the common stock underlying our stock options was determined at each grant date by our board of directors, with input from management. All options to purchase shares of our common stock are intended to be exercisable at a price per share not less than the per-share fair value of our common stock underlying those options on the date of grant.

In the absence of a public trading market for our common stock, on each grant date, we develop an estimate of the fair value of our common stock based on the information known to us on the date of grant, upon a review of any recent events and their potential impact on the estimated fair value per share of the common stock, and in part on input from an independent third-party valuation firm. As provided in Section 409A of the U.S. Internal Revenue Code of 1986, as amended (the “Code”), we generally rely on our valuations for up to twelve months unless we have experienced a material event that would have affected the estimated fair value per common share.

Our valuations of our common stock were determined in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation (the “Practice Aid”). The methodology to determine the fair value of our common stock included estimating the fair value of the enterprise using the “backsolve” method, which estimates the fair value of our company by reference to the value and preferences of our last round of financing, as well as our capitalization.

 

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

 

   

our stage of development;

 

   

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

 

   

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

 

   

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

 

   

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

 

   

equity market conditions affecting comparable public companies; and

 

   

general U.S. market conditions and the lack of marketability of our common stock.

The Practice Aid identifies various available methods for allocating enterprise value across classes and series of capital stock to determine the estimated fair value of common stock at each valuation date. In accordance with the Practice Aid, we considered the following methods:

 

   

Income approach. The income approach attempts to value an asset or security by estimating the present value of the future economic benefits it is expected to produce. These benefits can include earnings, cost savings, tax deductions, and disposition proceeds from the asset. An indication of value may be developed in this approach by discounting expected cash flows to their present value at a rate of return that incorporates the risk-free rate for the use of funds, the expected rate of inflation over the asset’s holding period, and the risks associated with realizing the cash flows in the amounts and at the times projected. The discount rate selected is typically based on rates of return available from alternative investments of similar type and quality as of the valuation date. The most commonly employed income approach to valuation is the discounted cash flow analysis.

 

   

Market Approach. The market approach attempts to value an asset or security by examining observable market values for similar assets or securities. Sales and offering prices for comparable assets are adjusted to reflect differences between the asset being valued and the comparable assets, such as, location, time and terms of sale, utility, and physical characteristics. When applied to the valuation of equity, the analysis may include consideration of the financial condition and operating performance of the company being valued relative to those of publicly traded companies or to those of companies acquired in a single transaction, which operate in the same or similar lines of business.

 

   

Cost Approach. The cost approach to valuation is based upon the concept of replacement cost as an indicator of value and the notion that an investor would pay no more for an asset than what it would cost to replace the asset with one of equal utility. The cost approach estimates value based upon the estimated cost of replacing or reproducing the asset, less adjustments for physical deterioration and functional obsolescence, if relevant. When applied to an enterprise, a type of cost approach referred to as the Net Asset Method is sometimes employed. This method measures the value of equity as the sum of the values of its assets reduced by the sum of the values of its liabilities. The resulting equity is reflective of a 100% ownership interest in the business. This approach is frequently used in valuing holding companies.

Based on our early stage of development and other relevant factors, we considered all three approaches and have chosen to apply both income and market approaches in our analyses. We determined these approaches were the most appropriate methods for allocating our enterprise value to determine the estimated fair value of our common stock for valuations performed for periods as of December 31, 2018 or earlier. In determining the estimated fair value of our common stock, our board of directors also considered the fact that our stockholders could not freely trade our common stock in the public markets. Accordingly, we applied discounts to reflect the

 

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

Following the completion of this offering, our board of directors intends to determine the fair value of our common stock based on the closing quoted market price of our common stock on the date of grant.

Income Taxes

We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are determined based on differences between the financial statement reporting and tax bases of assets and liabilities and net operating loss and credit carryforwards and are measured using the enacted tax rates and laws that will be in effect when such items are expected to reverse. Deferred income tax assets are reduced, as necessary, by a valuation allowance when management determines it is more likely than not that some or all of the tax benefits will not be realized.

We assess all material positions taken in any income tax return, including all significant uncertain positions, in all tax years that are still subject to assessment or challenge by relevant taxing authorities. Assessing an uncertain tax position begins with the initial determination of the position’s sustainability and is measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement.

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

Off-Balance Sheet Arrangements

Since our inception, we have not engaged in any off-balance sheet arrangements, as defined in the rules and regulations of the Securities and Exchange Commission.

JOBS Act Accounting Election

We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards, and therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

Recent Accounting Pronouncements

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

 

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BUSINESS

Overview

We are a growing cancer genomics company transforming the development of next-generation therapies by providing more comprehensive molecular data about each patient’s cancer and immune response. We designed our NeXT Platform to adapt to the complex and evolving understanding of cancer, providing our biopharmaceutical customers with information on all of the approximately 20,000 human genes, together with the immune system, in contrast to many cancer panels that cover roughly 50 to 500 genes. We are also developing a complementary liquid biopsy assay that analyzes all human genes versus the more narrowly focused liquid biopsy assays that are currently available. By combining technological innovation, operational scale, and regulatory differentiation, our NeXT Platform is designed to help our customers obtain new insights into the mechanisms of response and resistance to therapy as well as new potential therapeutic targets. Our platform enhances the ability of biopharmaceutical companies to unlock the potential of conducting translational research in the clinic rather than with pre-clinical animal models or cancer cell lines. We are also planning to release a diagnostic based on our NeXT Platform that we envision being used initially by biopharmaceutical customers and clinical collaborators. Since inception, we have provided our services to more than 45 biopharmaceutical customers, including several of the largest pharmaceutical companies in the world.

In the past decade, the biopharmaceutical community has achieved major advances in the treatment of cancer, including approval of therapies capable of targeting specific genetic drivers of cancer and novel immunotherapies that empower the immune system to attack cancer cells. Despite these advances, the substantial majority of currently available cancer therapies have significant limitations, including efficacy only in certain subsets of patients, limited long-term survival rates, and significant toxicities. Moreover, the current research and development paradigm in oncology is beset by significant inefficiencies and substantial costs, with the average cost per patient in clinical trials reaching approximately $60,000. While tumor molecular profiling technologies have enhanced research and development efforts, most current tumor biopsy and liquid biopsy tests analyze a relatively narrow set of roughly 50 to 500 tumor genes, missing key genes and immune mechanisms underlying cancer therapy. With the lack of a comprehensive profiling solution, biopharmaceutical companies often attempt to use a disparate array of tests to compensate, resulting in a fragmented view of the tumor biology, insufficient tumor sample, logistical complexities, and increased costs. The resulting data heterogeneity makes it difficult to mine for new biological insights across cohorts of patients in clinical trials. These piecemeal approaches to tumor molecular profiling often result in solutions that are difficult to use at scale, especially in a clinical or therapeutic setting where simplicity, cost, turnaround time, and validation are important.

Our platform helps biopharmaceutical companies seeking to develop more efficacious therapies by comprehensively interrogating a patient’s tumor and immune cells in detail, both to discover tumor vulnerabilities and elucidate potential therapeutic alternatives. To meet the demands of our customers, we built our NeXT Platform to be cost-effective and scalable with rapid turnaround times for tissue sample data and analytics. NeXT represents the next step of our existing ACE platform, allowing customers to move up the value chain by gaining more information from a single sample. We believe that our platform has the potential to enable a research, development, and treatment paradigm that is dynamic and adaptive to the evolving genomic and immune system landscape of patients’ tumors over time. We believe our technology will drive this evolving paradigm, which will ultimately enable our customers to develop safer and more efficacious therapeutics (see Figure 1). As the clinical utility of our platform increases, we expect to grow our diagnostic capabilities, including the ability to guide therapy based on a patient’s changing tumor and immune system, and supporting the commercialization of therapeutics developed by our biopharmaceutical customers.

 

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Figure 1. Personalis NeXT Platform addresses the increasingly complex understanding of cancer.

 

 

LOGO

Figure 1. Personalis NeXT Platform Addresses Increasingly Complex Understanding of Cancer. 1940s 1990s 2010s Future Chemotherapy Targeted Therapy Immunotherapy & Personalized Therapy Future of Cancer Therapy Increasing Therapeutic & Biological Complexity Single targets, biomarkers Established mechanisms Multiple targets, neoantigens Tumor & immune interaction Diverse escape mechanisms Complex therapeuticmechanisms Combinations Continuing evolution oftherapies & science New genomics tumor& immune biomarkers,escape mechanisms,cancer biology IncreasingDataComplexity ~ 50-500 genes in DNATumor only ~ 20,000 genes DNA & RNA Tumor and immune biomarkers Tumor and normal tissue Platform Evolution Cancer Panels Personalis NeXT PlatformFigure 1. Personalis NeXT Platform Addresses Increasingly Complex Understanding of Cancer. 1940s 1990s 2010s Future Chemotherapy Targeted Therapy Immunotherapy & Personalized Therapy Future of Cancer Therapy Increasing Therapeutic & Biological Complexity Single targets, biomarkers Established mechanisms Multiple targets, neoantigens Tumor & immune interaction Diverse escape mechanisms Complex therapeutic mechanisms Combinations Continuing evolution of therapies & science New genomics tumor & immune biomarkers, escape mechanisms, cancer biology Increasing Data Complexity ~ 50-500 genes in DNA Tumor only ~ 20,000 genes DNA & RNA Tumor and immune bio markers Tumor and normal tissue Platform Evolution Cancer Panels Personalis NeXT Platform

Personalis: The Genomics Engine for Next-Generation Cancer Therapies

Biopharmaceutical customers use our comprehensive platform across a diverse set of therapeutic approaches to cancer. We generate and analyze data from patients who participated in clinical trials, which we believe will enable these customers to develop more effective therapies. These opportunities represent a significant end market that is much larger than our initial clinical-trial focused market, as the spending on cancer therapies and supportive care drugs for cancer increased to $133 billion globally in 2017.

The information we generate is important to our customers developing three major classes of next-generation therapeutics: immunotherapies, targeted therapies, and personalized cancer therapies. Based on the approximately 195,000 patients who are currently expected to enroll in the over 1,600 immunotherapy, targeted therapy, and personalized therapy clinical trials that commenced in 2018, we estimate the total addressable market for multiple time point comprehensive tissue and liquid biopsy testing in clinical trials is over $5.0 billion annually. See the section titled “Market, Industry, and Other Data” for additional information regarding the data, sources, and assumptions we used for this estimate.

 

   

Immunotherapies: Over the past decade, a number of drugs have emerged based on the discovery that the immune system plays a key role in addressing cancer. Checkpoint inhibitors, a specific type of immunotherapy, generated worldwide sales of over $16.6 billion in 2018, up from approximately $1.4 billion in 2014. The commercial success of these drugs has shown the potential of immunotherapy; however, the development of new therapies in this category has been challenged by difficulties understanding the precise interaction between cancer and the immune system. The number of clinical trials in this space involving at least one cancer immunotherapy drug has grown from 123 that started in 2012 to 1,000 that started in 2018. Since our platform provides comprehensive insights on tumor and immune biology, we believe it will enable biopharmaceutical companies to better understand how therapeutics are working in patients.

 

   

Targeted Therapies: A growing category of successful cancer treatments consists of therapies that target specific genes or molecular mechanisms of cancer. These drugs are not designed to influence the

 

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immune system directly but the success of immunotherapies has brought acknowledgment that the immune system has a significant effect on their efficacy. Many of these targeted therapies are proposed to be tested in combination with immunotherapies. These therapies have grown to represent a considerable share of the overall oncology therapeutics market today. Comprehensively understanding each patient’s genomic and immune profile is critical to understanding which of these therapies a patient may respond to. We believe that more comprehensive coverage of all of the approximately 20,000 genes positions us competitively against existing cancer panels that cover roughly 50 to 500 genes. We are positioning our company to be a leading provider of the complex information that we believe will continue to inform the development of targeted cancer therapies.

 

   

Personalized Cancer Therapies: Many biopharmaceutical companies are pursuing personalized cancer therapies, which are designed and manufactured, individually, for each patient based on genomic alterations in a given patient’s tumor. While there are many potential approaches to developing these therapies, including neoantigen-based vaccines and T-cell therapies, all of them can potentially benefit from the data and analytics that our platform can generate about a patient’s tumor. Given the more than 700,000 cancer patients projected to be diagnosed with late-stage disease in the United States in 2019, we estimate that the total addressable market for our data and analytics for personalized cancer therapy could reach as much as $20 billion in the United States and as much as $40 billion worldwide. See the section titled “Market, Industry, and Other Data” for additional information regarding the data, sources, and assumptions we used for this estimate. Many of our customers have leveraged our U.S. Food and Drug Administration (the “FDA”) Device Master File as a component of their investigational new drug (“IND”) filings with the FDA. We anticipate that if drugs are approved that used our platform in the clinical trials forming the basis for approval, we may be able to derive revenue in connection with the sale of these drugs. We believe we are working with the majority of companies developing neoantigen-targeted personalized cancer therapies.

We anticipate that as the clinical utility of our platform is validated, we will have opportunities in connection with diagnostics and the commercialization of cancer therapeutics, which are significantly larger than our initial clinical-trial focused markets. Over time, we expect our biopharmaceutical customers and research collaborators to build evidence of clinical utility for our platform as a diagnostic for advanced cancer therapies. Separately, we are also acquiring samples and are building a database which will hold value for our biopharmaceutical customers and may ultimately allow us to discover new mechanisms of cancer treatment.

The NeXT Platform

Our NeXT Platform is designed to provide comprehensive analysis of both a tumor and its immune microenvironment, from a single limited tissue sample. Our platform covers the deoxyribonucleic acid (“DNA”) sequence of all of the approximately 20,000 human genes. We also report on the entire transcriptome of a tumor, which encompasses ribonucleic acid (“RNA”) expression across the approximately 20,000 human genes, allowing us to more accurately determine which of the many genomic mutations might actually be driving tumor progression. Furthermore, our platform analyzes elements of the immune cells that have infiltrated a tumor both from the adaptive immune system and the innate immune system.

Given the practical challenges in obtaining high-quality tumor samples via biopsy, we have developed our platform to work with a limited tumor tissue sample. Biopharmaceutical companies face significant challenges in attempting to divide samples to ship to multiple service providers to perform different tests. If a biopharmaceutical company is successful in acquiring results from multiple service providers, it is challenging to compare the results across multiple data platforms from multiple service providers. Our sequencing approach, validated with orthogonal technologies, allows us to run multiple analyses on a single sample. Our platform is composed of multiple proprietary technologies, many of which we have developed from the ground up. The breadth of the assays that we have integrated into our platform, our proprietary sample preparation process, and the comprehensiveness of our platform allow us to maximize the utility of often limited tumor tissue samples that our customers have from their clinical trials.

 

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We have also shown that our technology can analyze cell-free DNA (“cfDNA”) obtained from blood plasma, also known as a liquid biopsy. As with a tissue biopsy, we plan to analyze all of the approximately 20,000 human genes in each plasma sample, in contrast to currently marketed liquid biopsy panels. We are not aware of any other company that has publicly announced that they are developing a cell-free DNA (“cfDNA”) platform that analyzes all of the approximately 20,000 human genes. We expect this cfDNA to be obtained by a blood draw concurrently with a tissue sample. Together, the two samples can be used to provide a more comprehensive initial characterization of the tumor. Additionally, we expect to monitor changes in tumor genetics that arise in response to therapy through serial measurements using cfDNA samples collected across multiple time points. In 2020, we plan to launch our first liquid biopsy assay designed to analyze all human genes so as to detect potential neoantigens and tumor escape mechanisms that arise under therapeutic pressure. Although we believe our cfDNA test will offer new insights, we believe it will be most useful for our biopharmaceutical customers alongside our primary tumor biopsy product, given that a tumor biopsy is required to analyze gene expression and elucidate tumor-infiltrating lymphocytes which are critical to understanding cancer’s interaction with the immune system.

Our NeXT Platform was announced in late 2018, and the first revenues from this platform are expected in 2019.

Robust Operational Infrastructure to Scale with Our Customers

We have invested significant resources to develop an operational infrastructure that allows us to easily customize our services for each of our customers and scale rapidly to meet their potential research and commercial demands. Our NeXT Platform is complemented by our enterprise-grade software and bespoke information management systems that we tailor to meet our customers’ unique needs and integrate with their workflows. Moreover, our infrastructure provides customers with visibility and control over processes, ensures consistency across all components used for the duration of each clinical trial, is traceable for compliance purposes, and allows us to scale while maintaining rapid turnaround times.

We designed our proprietary informatics system, the Symphony Enterprise Informatics System (“Symphony”), as a flexible and scalable enterprise-grade system used to manage the unique complexities and challenges of our genomics laboratory. Symphony integrates laboratory information management systems (“LIMS”) and bioinformatics systems to connect laboratory operations with downstream data analysis. Symphony orchestrates all operational activities from our laboratory starting with sample receipt to the reporting of results of the genomic profiling and data delivery. We also use machine learning and artificial intelligence approaches to generate substantial performance advantages for our algorithms, such as neoantigen binding prediction.

We are sequencing and analyzing up to 100 trillion bases of DNA per week in our facility. We believe this capacity is already larger than most cancer genomics companies and we are building the automation and other infrastructure to scale further as demand increases and in support of the planned 2020 launch of our NeXT liquid biopsy assay.

Since 2012, we have been contracted to provide DNA sequencing and data analysis services to the United States Veterans Administration’s (the “VA”) Million Veteran Program (the “VA MVP”). The VA MVP began collecting samples in 2011 and is a landmark research effort aimed at better understanding how genetic variations affect health. Up to a million veterans are expected to enroll in the VA MVP study by 2021. With approximately 750,000 enrollees to date, the VA MVP exceeds the enrollment numbers of any single VA study or research program in the past, and is in fact one of the largest research cohorts of its kind. In September 2017, we entered into a one-year contract with three one-year renewal option periods with the VA for the VA MVP, and received orders under this contract in September 2017 and 2018. We are currently contracted to deliver approximately 80,000 genome sequence data sets to the VA MVP, and we expect revenue from the contracts awarded to date to continue into 2021. This relationship with the VA MVP has enabled us to scale our operational infrastructure and

 

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achieve greater efficiencies in our lab. It has also supported our development of industry-leading, large-scale cancer genomic testing. The substantial experience that we have and expect to continue to develop in whole genome sequencing also optimally positions us for what we anticipate to be the longer-term strategic direction of the cancer genomics industry, which may include whole genome sequencing of tumors.

We believe our platform is well positioned to scale rapidly and substantially as the field of personalized cancer therapies matures. We believe that our platform could be essential to the composition and manufacture of any personalized cancer therapy developed using our platform. Furthermore, we expect that patients would be tested at multiple time points during the course of treatment: first to design a therapy according to an initial genomic profile generated from a tissue and/or liquid biopsy, and then as follow-up testing via liquid biopsy to detect any changes that would require therapy modifications after initial therapeutic interventions. If a therapy that uses our NeXT Platform achieves regulatory approval, we believe that our commercial opportunity may increase substantially.

Personalis is Valuable to Biopharmaceutical Companies

We believe that our platform is valuable to our customers because:

 

   

Our tumor and immune molecular profiling capabilities provide an unprecedented breadth of data from a single limited tumor sample. We provide information on all of the approximately 20,000 human genes, as well as gene expression, the immune system, and other elements of cancer biology, in contrast to other currently marketed panels that cover a limited range of roughly 50 to 500 genes and do not focus on immune cells. The commercial success of immunotherapy drugs has demonstrated the need to better understand the immune system. Unfortunately, development of new therapies in this category has been challenged by difficulties understanding the precise interaction between cancer and the immune system. Since our platform provides comprehensive insights on tumor and immune biology, including in both innate and adaptive immune cells, we believe it will enable drug companies to better understand the biological effect of therapeutics in patients.

 

   

Our platform enhances the opportunity to conduct translational research by analyzing tumor tissues from patients in clinical trials, rather than animal models or in vitro cancer cell lines, which have historically limited cancer research. While conventional pre-clinical model systems, such as animal models and cancer cell lines, have been instrumental in early-stage cancer research and drug development, translation of results to the clinic has been limited and remains a significant barrier to progress, in part because these models do not sufficiently reflect the complexity of human cancer and the human immune system. Over recent years, tools used to study tissue from patients have improved and the utilization of tissue from trials has increased. We believe our platform represents the next step in this transition by further enabling biopharmaceutical companies to address the historical limitations of analyzing patient tissue comprehensively.

 

   

The information we provide to personalized cancer therapy companies is used to design therapeutics. Many biopharmaceutical companies are pursuing personalized cancer therapies, which are designed and manufactured, individually, for each patient based on genomic alterations in a given patient’s tumor. While there are many potential approaches towards developing these therapies including neoantigen therapeutics, peptide-based vaccines, RNA and DNA vaccines, virally or bacterially encoded vaccines, and adoptive cell therapies, all of them benefit from the data and analytics that our platform can generate about a patient’s tumor. We anticipate that drugs approved based on these therapeutic strategies may specify the use of our platform, enabling us to derive revenue in connection with the sale of commercial drugs, including the data generation and information processing required to treat each patient. We believe we are working with the majority of companies developing neoantigen-targeted personalized cancer therapies.

 

   

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

 

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resources to develop an operational infrastructure that allows us to easily customize our services for each of our customers and scale rapidly to meet their potential research and commercial demands. Moreover, our infrastructure provides customers with visibility and control over processes, ensures consistency across all components used for the duration of each clinical trial, is fully traceable for compliance purposes, and allows us to scale while maintaining rapid turnaround times.

 

   

We are developing a complementary liquid biopsy test, which also offers broad 20,000-gene coverage versus more narrowly focused liquid biopsy tests that are currently available. We have also shown that our technology can analyze DNA obtained from blood plasma, also known as a liquid biopsy. As with a tissue biopsy, we analyze all of the approximately 20,000 human genes. We are not aware of any other company developing a cfDNA platform that analyzes all of the approximately 20,000 human genes. We expect this cfDNA to be obtained by a blood draw concurrently with a tissue sample. Together, the two samples can be used to provide a more comprehensive initial characterization of the tumor. Additionally, we expect to monitor changes in tumor genetics that arise in response to therapy through serial measurements using cfDNA samples collected across multiple time points. In 2020, we plan to launch our first liquid biopsy assay designed to monitor known neoantigens and detect novel neoantigens and tumor escape mechanisms that arise under therapeutic pressure.

Our Strategy

Our mission is to transform the development of next-generation cancer therapies by providing more comprehensive molecular data about each patient’s tumor. To achieve this mission, our strategy is to:

 

   

Drive adoption of our platform by establishing and expanding relationships with leading developers of oncology therapeutics. We believe that we can address the leading companies in oncology therapeutics with a small team of sales representatives and highly targeted marketing efforts. We augment this team with Ph.D.-level Field Application Specialists that provide deep understanding and expertise in the areas of oncology and genomics applications, allowing us to develop sciences-based dialog with our customers who are conducting clinical trials in many parts of their organizations. Once we have completed pilot studies with these customers, we work to expand our footprint by partnering with them on additional clinical trials using the newest versions of our technology. For example, we have successfully utilized this strategy with one of our large biopharmaceutical customers, with our revenues from this customer growing from approximately $473,000 during fiscal year 2017 to approximately $2.3 million during the three months ended March 31, 2019. We plan to continue to enter into such partnerships and pursue a publication strategy that further demonstrates the utility of our platform.

 

   

Invest in new product innovations and enhancements to maintain our leading position. We will continue to make investments in new products that enhance our platform and further our competitive advantages. As the breadth of data used in drug development and cancer treatment becomes more and more complex, we believe our biopharmaceutical customers will look to our platform as a complete solution to drive efficiency in research and development. In 2020 we expect to launch a liquid biopsy test, which also offers broad 20,000-gene coverage versus the more narrowly focused liquid biopsy tests that are currently available.

 

   

Continue to build a body of evidence demonstrating the utility of comprehensive genomic data. We expect the actionable information that customers gain from our platform will increase demand for our services. We intend to align ourselves with our customers, enabling them to develop better cancer therapeutics, which in turn demonstrates the utility of our platform. We expect this supportive cycle to increase our penetration into pharmaceutical and biotechnology enterprises over time.

 

   

Continue to grow our relationship with the VA MVP. In addition to providing a stable source of revenue, our relationship with the VA MVP has enabled us to innovate, scale our operational

 

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infrastructure, and achieve greater efficiencies in our lab. The substantial experience that we have and expect to continue to develop in whole genome sequencing also optimally positions us for what we anticipate to be the longer-term strategic direction of the cancer genomics industry.

 

   

Leverage a growing body of evidence from our platform to develop a diagnostic. It is estimated that over 70% of oncology therapeutics in development are classified as personalized medicines, which require specific diagnostic testing prior to administration. We see a growing long-term diagnostic opportunity for NeXT as a one-stop, universal tumor profiling test for cancer patients. We are planning to release a diagnostic based on our NeXT Platform that we envision being used with biopharmaceutical and clinical partners.

 

   

Build out a comprehensive tumor-genomics database. We also see a growing long-term opportunity to generate rich databases of content across a large number of cancer patients. Most current diagnostic based databases built using cancer panels cover just a small fraction of genes and miss information about the immune system whereas our platform will provide comprehensive information. This database would serve as a valuable tool to discover new cancer biology, new biomarkers, and potential therapeutic targets. It may include integration with other sources of real-world data (“RWD”), such as electronic health records, which can generate real-world evidence (“RWE”) that may be used to reduce risk in early discovery by helping to identify biomarkers of response, improve trial execution through external control arms, expand indications for therapy, reduce trial size, and improve trial design.

Our Team

We have assembled a multidisciplinary team of experienced industry leaders to drive continuous innovation. Scientific and operational excellence is a guiding principle for our employees. As we have grown to over 145 employees, we have invested not only in the technology to provide information of sufficient quality for clinical use, but also in the people to continuously innovate for the industry’s growing and changing demands.

Our President and Chief Executive Officer, John West, co-founded our company in 2011 in conjunction with four Stanford professors, Euan Ashley, M.D., Ph.D., Atul Butte, M.D., Ph.D., Russ Altman, M.D., Ph.D., and Michael Snyder, Ph.D. More broadly, our executive officers and management team members have had previous experience at a variety of genomics, pharmaceuticals, biotechnology, diagnostics, data analytics, service, enterprise software, and technology companies including Agilent Technologies, Inc., Applied Biosystems Inc., ARMO Biosciences, Inc., Illumina, Inc., Informatica LLC, Ingenuity Systems, Inc., Lumentum Holdings Inc., Merck & Co., Inc., Molecular Dynamics, Inc., Natera, Inc., Novartis Pharmaceuticals Corp., Pacific Biosciences of California, Inc., RainDance Technologies, Inc., and Solexa, Ltd.

Financial Highlights

Our revenues have grown rapidly as our penetration of clinical trials in advanced oncology therapeutics has expanded, consistent with our reputation as a leader in the field. We generated revenues of $9.4 million, $37.8 million, and $14.1 million for the years ended December 31, 2017 and 2018 and the three months ended March 31, 2019, respectively. We also incurred net losses of $23.6 million, $19.9 million, and $5.7 million for the years ended December 31, 2017 and 2018 and the three months ended March 31, 2019, respectively.

As of March 31, 2019, we had $33.2 million of cash and cash equivalents, an increase of $11.4 million from March 31, 2018. Our revenues are primarily generated through sales of our services to biopharmaceutical companies and the VA MVP. Unlike diagnostic or therapeutic companies, we have not sought reimbursement through traditional healthcare payors. We have raised $89.6 million in preferred stock equity financing to date.

Our Industry

Despite the large sums invested in research and despite new treatments, cancer remains a major challenge for modern medicine and a source of high unmet medical need. According to a 2018 American Cancer Society

 

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report, “Cancer Facts & Figures,” as of January 1, 2016, there were more than 15.5 million people in the United States who were suffering from cancer or who had previously suffered from cancer, and more than 1.7 million people were expected to be diagnosed with the disease in 2018. Cancer prevalence is increasing globally as well. The World Health Organization (the “WHO”) predicted in its September 2018 estimates on the global prevalence of cancer that there would be 18.1 million new cancer cases and nearly 10 million cancer deaths globally in 2018. According to the WHO, the total economic impact of healthcare expenditure and loss of productivity resulting from cancer worldwide was approximately $1.2 trillion in 2010.

Improving Cancer Treatment is Increasingly About Leveraging Molecular Data

Despite the rapid evolution of cancer therapies, the current research and development paradigm in oncology is beset by significant inefficiencies and costs. Cancer therapeutics have one of the lowest clinical trial success rates of all major diseases. According to a study of 7,455 drug development programs during 2006 to 2015, the overall likelihood of FDA approval from Phase I clinical trial for oncology developmental candidates was 5.1%. The majority of currently available cancer therapeutics have serious limitations, including efficacy only in certain subsets of patients, limited long-term survival rates, and significant toxicities. The mechanisms underlying the success or failure of clinical trials are often poorly understood. To develop more efficacious cancer treatments, the biopharmaceutical community is faced with multiple key questions for a given therapeutic approach:

 

   

Why do some patients respond to treatment and others do not?

 

   

What are the underlying mechanisms of treatment resistance?

 

   

Are there additional therapeutic targets or alternative pathways that can improve outcomes?

 

   

What therapeutic combinations can improve outcomes?

 

   

Are there ways to increase patient response through personalized therapeutics?

 

   

Are there ways to reduce toxicity?

There is a growing recognition that there is a tremendous amount of untapped molecular data that can be derived from analyzing tumors from large numbers of cancer patients, whether in cancer clinical trials or post-commercialization, that can help answer some of these seminal questions and accelerate therapeutic development. The threefold increase in probability of FDA approval from Phase I clinical trial for therapies with biomarkers across all diseases and therapeutic types provides an indication of the benefits of leveraging molecular data.

Current Tumor Molecular Profiling Solutions Have Not Kept Pace with New Cancer Therapies

Biopharmaceutical companies are increasingly turning to tumor molecular profiling across large cohorts of patients to generate the data needed to answer these questions. Unfortunately, current tumor molecular profiling methods have not kept pace with new therapy development and overlook crucial elements of our evolving understanding of cancer biology.

Current tumor molecular profiling falls short for new cancer immunotherapies

Most current tumor molecular profiling panels were designed with a focus on targeted therapies, which, along with chemotherapy, have been used for cancer treatment for the past several decades. Targeted therapies treat cancers based on the specific genomic alterations driving their growth. Some targeted therapies have been developed to target specific molecules that are overexpressed or mutated in cancer cells. Because targeted therapies focus on cancer driver genes, the vast majority of tumor molecular profiling panels today, whether tissue or liquid biopsy based, typically sequence the DNA of between 50 to 500 genes, just a small fraction of the approximately 20,000 human genes.

 

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Recently, however, transformational new approaches to cancer therapy that have been developed to harness the patient’s own immune system have changed the treatment paradigm and our understanding of cancer biology. These new immunotherapies have dramatically improved the treatment of certain tumors that have previously been difficult to treat. Among these new immunotherapies, checkpoint inhibitors of the CTLA-4 and PD-1/PD-L1 genes are particularly effective. These therapies help “take the brakes off” the immune system and elicit a stronger immune response against the tumor. Patients can also be treated by adoptive cell therapy, in which the patient’s immune system is supplemented with cytotoxic cells that have been programmed to attack cells expressing specific antigens on their tumors. There are also new opportunities for personalized cancer therapies where a new therapeutic vaccine or cell therapy is developed for each patient. Despite early success, the majority of patients today still do not respond to immunotherapy, underscoring the importance of gathering data that can help biopharmaceutical companies understand factors governing response and resistance to therapy.

With these new immunotherapies and our rapidly evolving understanding of cancer biology, we believe the data needed to inform therapeutic development goes far beyond the typical 50 to 500 genes on current tumor molecular profiling panels. The paradigm has shifted from the need to understand mechanisms behind a single gene target to a dynamic, systems biology view involving complex interactions between thousands of genes in the tumor and the immune system in the pathogenesis of cancer and cancer drug response (see Figure 1).

Figure 1. Personalis NeXT Platform Addresses Increasingly Complex Understanding of Cancer. 1940s 1990s 2010s Future Chemotherapy Targeted Therapy Immunotherapy & Personalized Therapy Future of Cancer Therapy Increasing Therapeutic & Biological Complexity Single targets, biomarkers Established mechanisms Multiple targets, neoantigens Tumor & immune interaction Diverse escape mechanisms Complex therapeuticmechanisms Combinations Continuing evolution oftherapies & science New genomics tumor& immune biomarkers,escape mechanisms,cancer biology IncreasingDataComplexity ~ 50-500 genes in DNATumor only ~ 20,000 genes DNA & RNA Tumor and immune biomarkers Tumor and normal tissue Platform Evolution Cancer Panels Personalis NeXT PlatformFigure 1. Personalis NeXT Platform Addresses Increasingly Complex Understanding of Cancer. 1940s 1990s 2010s Future Chemotherapy Targeted Therapy Immunotherapy & Personalized Therapy Future of Cancer Therapy Increasing Therapeutic & Biological Complexity Single targets, biomarkers Established mechanisms Multiple targets, neoantigens Tumor & immune interaction Diverse escape mechanisms Complex therapeutic mechanisms Combinations Continuing evolution of therapies & science New genomics tumor & immune biomarkers, escape mechanisms, cancer biology Increasing Data Complexity ~ 50-500 genes in DNA Tumor only ~ 20,000 genes DNA & RNA Tumor and immune bio markers Tumor and normal tissue Platform Evolution Cancer Panels Personalis NeXT Platform

 

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Information about all of the approximately 20,000 human genes allows deeper insight into the biology of cancer, identifying novel or patient-specific therapeutic targets, including neoantigens, and predictive biomarkers of response to therapy. Understanding the immune cell signatures in the tumor microenvironment and immune repertoire changes is critical for understanding drug response. In addition to DNA, comprehensive RNA expression information from the tumor is needed to analyze complex pathways that may be activated in the tumor. It is important to identify the increasingly complex mechanisms of tumor response and resistance to cancer therapy, such as neoantigen burden, tumor antigens, deficient antigen presentation, oncogenic pathways, immune evasion pathways, HLA mutations, T-cell clonality, immune infiltration, and others. Table 1 describes some of the biological gaps in current panels. Most of these elements go beyond the capabilities of today’s tumor molecular profiling panels.

Table 1. Most current tumor tissue and liquid biopsy profiling panels miss critical tumor and immune biology.

 

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Figure 2. Lack of a comprehensive tumor molecular profiling platform leads to major challenges for cancer therapy development.

 

 

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Lack of a comprehensive tumor genomics platform Narrow genomics panels and fragmented, piecemeal tumor profiling as stop gap solutions Fragmented, incomplete picture of tumor genomics Sample exhaustion Complex logistics High cost Slow turnaround Data heterogeneity Analytical gaps Poor validation support for clinical, therapeutic, diagnostic use Obstacles to new therapeutic insights

Fragmented tumor molecular profiling approaches result in a fragmented view of biology and limited insights

With the lack of a comprehensive profiling solution, biopharmaceutical companies often turn to fragmented, piecemeal approaches to tumor molecular profiling as a stopgap measure (see Figure 2).

Those fragmented tumor molecular profiling approaches lead to major problems for therapeutic development. Limitations in available tumor samples, including liquid biopsies, force scientists to pick and choose which profiling platforms to include and which to omit, resulting in a fragmented picture of the biology. Fragmented profiling solutions also result in inconsistent profiling from patient to patient, and clinical trial to clinical trial. This results in data heterogeneity that makes it difficult to mine for new biological insights across cohorts of patients in trials. Finally, these piecemeal approaches to tumor molecular profiling result in solutions that often are difficult to use at scale in a clinical or therapeutic setting where logistical simplicity, cost, turnaround time, and validation are important.

Current tumor molecular profiling panels can become antiquated with evolving science

With the explosion of immunotherapy and advances in our understanding of cancer, new insights into the underlying mechanisms of response and resistance have emerged. New putative genetic or immune biomarkers of response are regularly identified for different therapies in the context of different cancers. For instance, new biomarkers have been identified including tumor mutational burden, neoantigens, HLA type, B2M mutations, TGFß, JAK1/JAK2 mutations, expression signatures, cytotoxicity signatures, and T-cell clonality, among others. A recent Nature Medicine review identified 18 different categories of biomarkers correlating with immunotherapy response spanning tumor, immune cells, and the tumor microenvironment. Due to the limited coverage of most cancer panels, they may miss new biomarkers. We believe this problem will continue as research uncovers new insights into cancer.

 

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Our Platform: Advanced Tumor Molecular Profiling Built for the Future of Cancer Therapy

Our NeXT Platform ushers in a new paradigm for tumor molecular profiling by looking beyond the roughly 50 to 500 genes that limit current tumor profiling solutions. NeXT is designed to elucidate both the tumor genomics and its immune microenvironment simultaneously, representing a major step forward in tumor molecular profiling. Our platform interrogates all of the approximately 20,000 human genes in each tumor, generating more comprehensive molecular information than current profiling panels, from a single limited tumor sample. We have built NeXT to not only address the complex biology of new immunotherapies, but also to be broad enough to accommodate our rapidly evolving and increasingly complex understanding cancer. Finally, through technology innovation, we have made comprehensive tumor molecular profiling cost-efficient and scalable, enabling its use for large-scale profiling of cancer patients.

NeXT enables a paradigm where each cancer patient can benefit from comprehensive tumor molecular profiling, providing important data for cancer therapy development, personalized therapies, therapy selection, and diagnostics. Our platform enables biopharmaceutical customers to increase the insights generated from each tumor sample, reduce data heterogeneity, and simplify the process of tumor analysis. Our platform can be used to advance therapeutic development by elucidating diverse mechanisms of tumor escape, detecting neoantigens, identifying novel biomarker signatures, and characterizing the immune response.

Figure 3. The NeXT Platform generates the most comprehensive view of the tumor and immune biology today, all from a single limited sample.

 

 

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NeXT Platform Tumor Immune Cells & Microenvironment Germline Comprehensive Tumor & Immune Biology For Every Patient From a Single Limited Sample On a Single Platform Proprietary Assay & Content Proprietary Analytics & Validation DNA & RNA Coverage Over 20,000Genes ACE assay technology enhances accuracy Validated analytics for DNA and RNA mutations True TMB Neoantigens ACE assay technology Proprietary mass spec data Proprietary neural networks Tumor Escape & Immunomodulators ACE assay technology Integrated DNA & RNA analytics HLA Type & Mutations Proprietary design to enhance accuracy Validated high accuracy algorithms Immune Repertoire Proprietary design boosts CDR3 Analytics for immune repertoire MSI Enhancementin MSI regions not covered by exomes Both canonical and exome based MSI computation Clinical validation* Oncoviruses Proprietary design Sensitive and specific detection* Immunocellular Deconvolution Proprietary RNA signatures* Immune cell signature scores* Diagnostic Report Boost >1000X in clinical footprint for clinical grade coverage Clinically validated analytics and reporting*

 

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NeXT Platform: Overview of Key Features & Differentiators

Comprehensive tumor and immune genomics from a single limited sample

 

   

Sequencing and analyzing all of the approximately 20,000 human genes generates more comprehensive molecular information than current tumor tissue and liquid biopsy panels focused on roughly 50 to 500 genes

 

   

Covers a much broader set of biomarkers for new immunotherapies and traditional targeted therapies

 

   

Analysis of both tumor DNA and RNA expression

 

   

Analysis of both tumor and normal tissue

 

   

Analysis of non-human species such as oncoviruses (analytics in development)

 

   

NeXT liquid biopsy, which we plan to launch in 2020, will target approximately 20,000 genes, enabling testing at multiple time points

 

   

Proprietary technology enables superior sequencing quality and advanced analytics

Makes single, comprehensive tumor molecular profiling practical for cancer patients

 

   

Tumor and immune molecular profiling from one limited tumor sample

 

   

Engineered to be cost-effective and scalable, with rapid turnaround times, making it suitable for large-scale profiling of cancer patients

 

   

Overcomes the need for fragmented tumor testing

 

   

One platform for both research and clinical use

Platform anticipates future cancer biomarkers that will come with evolving science

 

   

NeXT overcomes the limitations of small panels that become out of date when new genetic biomarkers or therapeutic targets are identified

 

   

Comprehensive coverage of all genes, DNA and RNA, tumor and normal tissue, and immune biology enables our platform to accommodate new genetic biomarkers and signatures as they are published

Generates comprehensive, harmonized data across patients to enable large-scale database creation and insight

 

   

Comprehensive profiling for large cohorts of patients leads to more useful databases for biopharmaceutical customers using our platform and our internal database

 

   

Opportunity for integration with other sources of RWD such as electronic health records to generate RWE that may be used by biopharmaceutical customers to inform and accelerate therapeutic development

 

   

Data harmonization, analytics, and machine learning maximize therapeutic insight

 

   

Comprehensive nature of the platform provides long-lasting data relevance, yielding new insights over time as new biomarkers are identified

 

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NeXT Platform: Advanced Tumor Molecular Profiling Built for Present and Future Cancer Therapies

To elucidate the complexity of tumor and immune biology, we have developed many new technologies that enable our platform to generate and analyze an order of magnitude more genomic data than most other cancer panels (see Figure 4). Our proprietary technologies and innovations span the entire NeXT Platform, including sample sparing preparation, advanced genomic sequencing, and new analytics with machine learning algorithms. We have also developed proprietary software and automation to integrate and scale the data, complex assays, analytics, and workflows underlying the platform (see Figure 5).

Figure 4. The order of magnitude increase in biological complexity, data size and analytical complexity has required innovation throughout the entire NeXT Platform.

 

 

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Analytics Personalis NeXT Genomic Data Generated Immune Panels Cancer Diagnostic Panels 20,000 genes 100 genes 1GB 100GB DNA variants RNA variants Expression Sig TMB Neoantigens HLA MSI TCR/BCR TILs Oncoviruses DNA variants Limited RNA variants INNOVATION Genomics & Assays Analytics Machine Learning Automation Information System

Figure 5: Areas of innovation across the NeXT Platform.

 

 

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Proprietary Sample Sparing Prep & Chemistry Advanced Genomics Sequencing Assays Machine Learning & Analytics Lab & Process Engineering Symphony Enterprise Informatics Platform Regulatory Chen

 

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Through our technology innovation, proprietary methods, and intellectual property, our platform is capable of detecting mutations across all of the approximately 20,000 human genes in both DNA and RNA, immune repertoire for TCR a, ß, g, d and BCR l, k, immune signatures, diverse tumor escape mechanisms, and oncoviruses (in development). Compared to traditional cancer panels, our platform is broader in multiple dimensions.

Figure 6. NeXT generates broader biological insight than existing panel approaches.

 

 

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NeXT Platform DNA Sequencing RNA Sequencing Immune Cells Tumor Infections cfDNA Exome Typical Panels 50-500 Genes ~20,000 Genes for TUMOR ~20,000 Genes for NORMAL ~20,000 Genes for TUMOR TCR- Only T-cells B-cells (IGH, IGK, IGL) & Innate Immune cells Human Only 1st Multi-Species Exome: Human + Oncoviruses (HPV, HBV, HCV, EBV, HTLV1, KSHV) 50-500 Genes ~20,000 Genes Cell-Free DNA

Covers Biomarkers for Current and Future Therapies Through Broad Sequencing and Analysis of Approximately 20,000 Human Genes

Far beyond current cancer panels focused on roughly 50 to 500 genes, our platform sequences all of the approximately 20,000 human genes, enabling a broader view of tumor and immune genomics. Mutations of all types including single nucleotide variants, insertion-deletions, fusions, and copy number variations have been implicated in tumor resistance and response mechanisms for both targeted cancer therapies and immunotherapies, and thousands of these mutations can occur in each tumor. Our platform can identify crucial tumor and immune biomarkers, including in the tumor microenvironment, related biomarkers and critical alterations in the antigen presenting machinery, DNA repair and replication, immune checkpoint modulation, tumor associated antigens, immune response, microsatellite instability, cytokines and chemokines, and cytotoxicity.

Simultaneously Provides Both Tumor and Immune Insights, including T and B Cell Repertoire

Simultaneously understanding both the tumor cells and the immune cells is critical for a deeper understanding of patient response to therapy. Unlike most cancer profiling panels that are focused on the tumor or immune repertoire alone, NeXT interrogates both the tumor and immune repertoire simultaneously. This is crucial as both the tumor and immune microenvironment can impact therapy response. Our platform sequences the broad immune repertoire including TCR a, b, g, d and BCR l, k from tumor FFPE (and fresh frozen) samples. The immune repertoire specific sequencing data derived from the NeXT assay is processed by our analytics, and a report is generated providing key metrics such as clonality, CDR3 nucleotide and amino acid

 

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sequences, clonotype quantitation, distribution, and frequency, V, D, and J gene segments usage and overlap, and CDR3 nucleotide sequence length. These deliverables enable researchers to investigate the immune repertoire’s potential as a predictive biomarker of response to immunotherapies and combination therapies.

Analyzes Both DNA and RNA for a Patient’s Tumor

In contrast to most cancer diagnostic panels, the NeXT Platform sequences and analyzes both the DNA and RNA, which is extracted from the same limited sample. As shown in Figure 7, DNA and RNA sequencing data yields complementary insights into the tumor and immune genomics, providing a more complete view of tumor features that can impact cancer therapy. Furthermore, by simultaneously looking at both, there are new opportunities to combine information to improve analytical results for neoantigens and other advanced biomarkers, which can include multi-gene signatures.

Figure 7. DNA and RNA from our platform yield different but synergistic insights into the tumor and immune genomics.

 

 

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Personalis NeXT DNA Personalis NeXT RNA Approx. 20,000 Genes Single Nucleotide Variants (SNVs) Putative Neoantigens Copy Number Variants HLA Type MSIMutational & Neoantigen Burden Approx. 20,000 Genes Gene Fusions Gene Expression Allele Specific Expression Immune Signatures Pathway Signatures SNVs Immune Repertoire Roughly 50-500 Genes In DNA, Limited RNA Typical Cancer Panels

Analyzing Both Tumor and Normal Tissue

Most cancer panels do not sequence the genome of the patient’s non-cancer tissue (“normal tissue”), which can contain pertinent information for understanding therapy response. By analyzing the normal tissue from the patient (typically blood samples), we improve the accuracy of identifying cancer specific mutations by using genetic variants found in the normal tissue as a reference point. Panels that do not utilize the normal tissue as a reference point can mistake germline mutations for cancer mutations. Furthermore, the normal tissue can yield additional genetic information that may be relevant to interpreting cancer therapy response. One example of this is HLA type, which has been correlated with response to immunotherapy. Germline mutations can also predispose patients to cancer.

 

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Analysis of Neoantigens with Proprietary Assay Design and Machine Learning Algorithms

Neoantigens are derived from tumor-specific mutations that vary from patient to patient and can potentially trigger an immune response to the tumor. When neoantigens bind to and are presented on the major histocompatibility complex (“MHC”) on cells, they can be recognized as “foreign” by the immune system and elicit an immune response to the tumor. Because of this, neoantigens have attracted strong biopharmaceutical interest as both a therapeutic target for personalized therapies and a biomarker for drug response. The predicted neoantigen burden in tumors has also been reported to be a biomarker of response of immunotherapies in certain cancers. Many neoantigens are missed by narrow cancer panels because they can arise from mutations in any of the approximately 20,000 human genes.

To enable these applications, we have developed proprietary methods to better identify and characterize neoantigens from a patient tumor sample. We have designed proprietary assay and algorithmic elements in NeXT including enhanced DNA and RNA sequencing technology, HLA typing, MHC-binding prediction, similarity-to-self, similarity-to-known antigens, and immunogenicity that are all used to improve detection and characterization of potential neoantigens.

Figure 8. Our neoantigen prediction engine combines proprietary assay design and proprietary analytics to identify and characterize neoantigens.

 

 

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Cancer Analysis Modules DNA cancer Exome RNA Cancer Transcriptome Neoantigen Analysis Modules Antigen Processing Antigen identification (phasing, snv, Indel , fusion ) MHC binding prediction (class I & II) similarity to known antigens similarity to self immunogenicity gene expression level (RNA) variant allele frequency (RNA) Delivarable NeoantigenID

The MHC-binding prediction for each candidate neoantigen is a particularly critical step in the neoantigen characterization process. There are multiple variants (“alleles”) of MHC proteins present in any individual and these alleles also vary between individuals. Each MHC variant has a unique set of peptides or neoantigens that it can present to the immune system. If an individual does not have an MHC allele that can bind to a particular neoantigen it will not be able to trigger an immune response to the tumor.

While academic groups have developed machine learning algorithms that can help predict the binding of peptides to individual MHC alleles, these algorithms were built upon data that was obtained from many different sources and was of limited quantity and varying quality. To address the limitations of existing tools, we have generated our own MHC binding data and used this high quality, systematically collected data as the basis for training our machine learning algorithms.

We have engineered proprietary cell lines that express only one MHC allele at a time and used a combination of chromatography and mass spectrometry to determine which peptides are bound to each allele. We believe we have one of the most comprehensive databases of peptide binding to specific MHCs of this type. We use this data and our computational tools to build proprietary peptide binding predictions that are individualized for each MHC allele.

As seen in Figure 9, our MHC neoantigen binding predictions perform more accurately than the best publicly available prediction tools. A good prediction algorithm should be able to accurately identify peptides

 

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that are well known to bind to a specific MHC receptor. There are two ways to measure the power of a neoantigen prediction algorithm: the ability to accurately identify a given neoantigen as binding to a specific MHC, known as precision (which is a measure of how likely the predicted binding is to be correct, meaning true positives divided by true positives plus false positives), and the ability to find all known neoantigens that bind to that MHC, known as recall (which is a measure of how likely binders will be found, meaning true positives divided by true positives plus false negatives). We attribute the increased accuracy of our predictions to the high quality of the data we have generated, as well as our proprietary machine learning algorithms.

Figure 9. Predictive power of our MHC neoantigen binding method compared to standard methods.

 

 

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Precision Recall NeoantigenID Tool A Tool B Tool C Precision Recall

Elucidating a Broad Set of Biomarkers Spanning Tumor and Immune Biology

Since we offer a more comprehensive platform than others, we enable a broader analysis of key genomic biomarkers and signatures across multiple tumor and immune biomarker categories, such as neoantigens, HLA, immune modulator, DNA repair and replication, tumor-associated antigens, immune signatures, cytotoxicity, cytokines and chemokines, antigen processing machinery, and others (see Figure 10). Many of these biomarkers require both simultaneous assay and analytical technology development.

 

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Figure 10. Broad biomarkers enabled by our platform give a comprehensive view of the biology.

 

 

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Somatic mutations in HLA loci PD-L1, CTLA-4,OX40, LAG-3, TIM3,KIR, ICOS, etc. BAT-25, BAT-26,NR-21, NR-24,NR-27, and more MMR, POL-E, MLH-1,BRCA1, BRCA2, etc. PRAME, MAGE, SSX2,MUC1, CTAG1B AIF1, IL2, IRF1,STA1, VCAM1 GNLY, GZMA,GZMB, PRF1 Interleukins, CXCL1, 9, 10, 12, CXCR3, etc. B2M, TAP,Proteasome,ERAP1, etc. HLA Immune Modulators MSI DNA Repair & Replication Tumor-Associated Antigens (TAAs) Adaptive &Innate Immune Response Cytotoxicity Cytokines & Chemokines Antigen Processing Machinery (APM)

In contrast to traditional approaches where assays are designed independently from the analytics, we have co-optimized our genomic assay design and analytics simultaneously to enable both unique analytical capabilities and enhanced performance for key biomarkers. Figure 11 summarizes some of the approaches we developed to achieve superior performance and comprehensiveness in our platform across a broad range of biomarkers:

Figure 11. Proprietary genomic assay and analytical innovations to enable NeXT.

 

 

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NeXT Platform Proprietary Assay & Content Proprietary Analytics & Validation DNA & RNA Coverage Over 20,000 Genes ACE assay technology enhances accuracy Validated analytics for DNA and RNA mutations True TMB Neoantigens ACE assay technology Proprietary mass spec data Proprietary neural networks Tumor Escape & Immuno-modulators ACE assay technology Integrated DNA & RNA analytics HLA Type & Mutations Proprietary design to enhance accuracy Validated high accuracy algorithms Immune Repertoire Proprietary design boosts CDR3 Analytics for immune repertoire MsI Enhancement in MSI regions not covered by exomes Both canonical and exome based MSI computation Clinical validation* Oncoviruses Proprietary design Sensitive and specific detection* Immuno-cellular Deconvolution Proprietary RNA signatures* Immune cell signature scores* Diagnostic Report Boost >1000X in clinical footprint for clinical grade coverage Clinically validated analytics and reporting* * In development

Superior Sequencing Quality and Coverage

Next generation sequencing (“NGS”) is the technological basis for many tumor molecular profiling platforms today. NGS rapidly sequences nucleic acids and then uses a computationally intensive process to reconstruct gene sequences from millions of short sequence segments. These segments are processed in parallel, an approach that greatly increases the speed that the sequence data can be generated. However, because the segments come from random locations in the genome, reassembling the original sequence is both a technically

 

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and computationally challenging process. A key objective is to ensure that every portion of the genes being sequenced is covered by at least one sequence segment. The average number of sequence segments representing a gene is referred to as the sequence depth. The deeper the coverage, the greater fraction of the gene is likely to be covered and the higher confidence that low-frequency variants can be found.

However, even when sequenced to high depth, typical NGS approaches can leave uneven, poor coverage in genes with mutations linked to cancer and cancer therapy. Many of these regions cannot be fully covered by simply sequencing to higher depth because their sequencing coverage deficits are due to inherent limitations of the NGS platform. Regions of high guanine-cytosine (“GC”) content or repetitive sequence regions are two such examples of regions that are difficult to cover with standard NGS assays. This can leave gaps in coverage of therapeutically important genes (see Figure 12). This is particularly problematic in cancer, where there can be significant heterogeneity in the tumor samples that can make it even harder to see mutations in regions of poor coverage.

Figure 12. Coverage of SKT11 gene with standard NGS techniques leaves gaps in critical exonic regions.

 

 

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Coding Position Chromosomal Position Missed Exons Missed Exons

To address the limitations of typical NGS-based assay, we have developed our patented Accuracy and Content Enhanced (“ACE”) technology for next-generation sequencing. ACE improves nucleic acid preparation processes and combines it with patented assay and sequencing methods to achieve superior, high-fidelity, clinical-grade sequencing quality that ensures high sensitivity for mutations that can inform clinical and therapeutic applications such as neoantigen prediction, biomarker identification, and novel drug target selection.

Our NeXT Platform uses our ACE technology to provide coverage of difficult-to-sequence gene regions across all of the approximately 20,000 human genes, filling in key gaps left by other NGS approaches. ACE technology provides superior and uniform coverage of difficult genomic regions, such as high GC content areas, and fills gaps and inconsistencies in sequencing to achieve an optimal output (see Figure 13). ACE is able to deliver more comprehensive coverage not by simply generating more data, but by generating higher quality data. We and others have shown in two publications that our ACE technology achieves superior gene sequencing coverage and finishing (see Figure 14).

 

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Figure 13. Coverage of SKT11 with our ACE sequencing process.

 

 

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Chromosomal Position Coding Position

Figure 14. Personalis’ ACE technology achieves superior sequencing coverage and gene finishing.

(Patwardhan et al Genome Med. 2015)

 

 

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Liquid Biopsy Capabilities

Liquid biopsy approaches look at cfDNA in plasma samples derived from the blood. cfDNA is DNA that is released into circulation by cells, including tumor cells, as a result of cell death. This cfDNA can be obtained by a blood draw and can be used to monitor changes in tumor genetics.

We believe tumor biopsy and liquid biopsy approaches to tumor molecular profiling can provide complementary information for each patient. Tumor biopsies provide tumor immune microenvironment and tumor gene expression information that current liquid biopsy panels do not provide. Liquid biopsies can be useful for providing additional DNA mutation information, especially for monitoring therapy response across different time points when tumor biopsies are not feasible. Unlike typical liquid biopsy panel approaches focused on roughly 50 to 500 driver genes, we are designing our cfDNA approach, NeXT Liquid Biopsy, which is currently in development, to sequence all of the approximately 20,000 genes in the human genome. Our broader liquid biopsy approach will help biopharmaceutical customers identify biological changes across multiple time points for each patient in their trials that they would otherwise miss with the current, narrowly focused liquid biopsy panels. We also believe broader coverage will enable better neoantigen prediction, broader biomarker coverage, and higher potential to identify new drug targets.

Figure 15: ImmunoID NeXT tumor biopsy and NeXT liquid biopsy (in development) yields complementary data.

 

 

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ImmunoID NeXT Tumor Biopsy NeXT Liquid Biopsy (in development) Tumor & Immune DNA Sequencing on Approx. 20,000 Genes From Tumor RNA Sequencing on Approx. 20,000 Genes From Tumor Tumor Mutations From RNA Gene & Immune Expression Signatures, Pathways Broad Fusion & CNV Detection Neoantigens Tumor Mutations From DNA Sequencing Approx. 20,000 Genes From ctDNA Monitoring Across Multiple Timepoints Roughly 50-500 Gene Panels Typical Liquid Biopsy Panels

We believe that combining tumor biopsies with cfDNA can provide a more complete picture of the spectrum of mutations found in a cancer patient. As an example of this, we compared the mutations found in eight late-stage colorectal tumor biopsy samples with those found in the plasma taken at the same time. We found a range of overlap between tumor biopsy-identified sequence variations and the sequences generated using

 

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cfDNA. These observations show that, while there was significant overlap between the tumor and liquid biopsy results, there were also mutations unique to tumor biopsy and vice versa (see examples of this in Figure 16). This observation underscores the concept that tissue and liquid biopsies may be complementary, and when combined, may provide a more complete picture of the patient’s disease.

Figure 16. Overlap of sequence variations detected in matched tumor and blood plasma.

 

 

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

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

NeXT makes comprehensive tumor molecular profiling practical for cancer patients at scale

To deliver a comprehensive immune-genomic assessment of a tumor, we invested substantial resources to engineer NeXT to provide data and analysis that would otherwise be unavailable or require many individual technologies, which collectively present significant costs and logistical impracticalities. With NeXT, we built a proprietary platform that is comprehensive, cost-effective, and scalable and enables a short turnaround time, making it practical to profile cancer patients at scale. This has required innovation on a number of fronts.

Comprehensive tumor and immune molecular profiling from a single limited tumor sample

The quality and quantity of tumor sample available for each patient is often very limited. We have developed proprietary techniques to overcome the challenges of working with these samples.

Tumor tissue biopsies, fine needle aspirates (“FNAs”), core biopsies, surgical resections, and blood specimens collected from cancer patients’ samples are typically stored as fresh frozen (“FF”) or formalin-fixed, paraffin-embedded (“FFPE”) tissue. In both cases, there is typically limited tumor tissue available for molecular profiling. This can make it challenging, if not impossible, to achieve a comprehensive picture of the biology for each patient.

The quality of the tumor samples can also be a significant challenge. The best type of tumor sample for DNA and RNA sequencing and analysis is widely recognized to be FF biopsies. However, FF biopsies are not routinely collected because FFPE material is the specimen of choice for histopathological diagnosis. In almost every case, DNA extracted from FFPE specimens is degraded due to specimen processing, resulting in nucleic acid fragmentation, DNA crosslinks, random loss of nucleotide bases, localized DNA denaturation, strand breaks, and modification of bases leading to mutation artifacts which impede downstream sequencing analysis.

 

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Conversely, FF samples are expensive to store and difficult to collect for large-scale studies. FFPE samples’ quality issues exacerbate the issue of limited sample availability because when tissue is degraded, more of it is needed to generate sufficient sequencing data.

We have a simplified process using a dual simultaneous extraction of both DNA and RNA from challenging FFPE samples in a tissue-sparing manner. This allows us to use less tissue biopsy overall while preserving the quality of the extraction. When combined with our comprehensive assay, we are able to generate much more comprehensive data from a single limited sample than other platforms.

We have also developed techniques to overcome the challenges of working with difficult and degraded samples, including FFPE, FNAs, FF, PBMCs, and plasma. We are able to achieve high success rate with our customers. For prospectively collected FFPE samples with our personalized therapy partners, we achieve a greater than 95% success rate for obtaining high-quality data from tumor samples received from personalized cancer therapy customers due to our optimized nucleic acid extraction protocols.

Our proprietary software and operational infrastructure

We leverage Symphony, laboratory automation and protocols, and other technological improvements to power our NeXT Platform.

Symphony Enterprise Informatics Platform

Symphony is a flexible and scalable enterprise-grade system designed to manage the unique complexity and challenges of our large-scale genomics and analytics.

Symphony also integrates our LIMS and bioinformatics systems to connect laboratory operations with downstream data analysis. Symphony orchestrates all operational activities from the laboratory starting with sample receipt to the reporting of results of the tumor molecular profiling and data delivery. We developed Symphony to address the specific challenges associated with genomic data. Genomic data is unique in its size and complexity, even at the level of a single patient. The complexity is driven by data heterogeneity, such as DNA mutations, expression data, T-cell repertoire, and other sources, and the multifaceted workflows required to derive this data.

When scaled to the tens of thousands of samples per year, the complexity of genomic data grows and presents immense software engineering challenges. Since we did not identify any commercially available enterprise software system capable of addressing these challenges, we custom built Symphony from the ground up to address these specific challenges. In addition, Symphony manages multiple data and reporting streams with transparent versioning and traceability. This infrastructure allows us to meet the needs of all of our customers and provides a robust framework for future expansion as our customers anticipate clinical approval of their products.

 

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Figure 17. Key customer benefits of Symphony.

 

 

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Sample arrival Accessioning & entry into LIMS and Symphony DNA/RNA extraction & Quality Control (QC) Notice of QC pass/fail results DNA/RNA library preparation & QC DNA/RNA sequencing & QC Bioinformatics, analytics, & QC Secure data delivery, sample return, & review with Field Applications Scientists (FAS) Symphony enables: Sample compliance Pipeline lock down Expedited turnaround time Data transfer specifications Research Use Only (RUO), Good Clinical Laboratory Practice (GCLP) environments Customized data delivery capability

Laboratory scale and automation

We have developed robust standard operating protocols and workflows that enable the accurate and efficient processing of samples from acquisition to data reporting. The combination of these standard protocols with dedicated staff and laboratory robotics has allowed us to develop an infrastructure that is designed to operate at scale. Our sequencing capacity has significantly increased each year since 2016, and we have an anticipated capacity of sequencing over 100,000 whole-genome length samples a year. Our high-performance computing infrastructure is capable of processing and storing the vast amount of data we generate with thousands of CPUs and petabytes of storage.

Enabling rapid turnaround time

Given the therapeutic and diagnostic applications of our platform, our customers require rapid turnaround times. The above technologies, which we have developed over years of engineering and optimization, allow us to achieve rapid turnaround times consistent with our customers’ expectations, while also addressing the data complexity and achieving the level of comprehensiveness discussed above. For our personalized therapy partners, for example, we routinely deliver data and analytics in less than two weeks from sample receipt. Reductions in turnaround time have also required optimization of our laboratory processes. Our approach incorporates staffing of multiple shifts and over the weekends, so that each sample continues movement towards completion as rapidly as possible. We have purchased and installed highly parallel laboratory instruments, high-performance computing equipment, and multiple laboratory robots, developed laboratory workflow automation software, and invested in a significant multi-year research and development effort to integrate these pieces.

Delivering value to our customers

To deliver a comprehensive immuno-genomics assessment of a tumor, NeXT combines many elements that would previously have been individual assays, each with significant cost. These include a exome-scale sequencing assay that covers approximately 20,000 genes at high depth of sequence coverage, a transcriptome, a focused panel of cancer driver genes, a T-cell repertoire assay, a B-cell repertoire assay, an HLA typing assay, a microsatellite instability assay and several separate oncoviral assays. Although it has taken us several years to develop, optimize and validate, NeXT can now deliver all of these in a single platform, from a single sample. This is a major simplification of the testing process requiring fewer samples to be collected from each tumor. We offer NeXT at a cost that is competitive with tests that only address a single aspect of the spectrum of results NeXT delivers.

 

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Breaking down the traditional separation between research and clinical platforms

Key parts of our platform have been analytically validated to support use in clinical trials, personalized therapies, and diagnostics.

We have actively differentiated our company and our services by building our ability to support our customers’ regulatory filings, particularly with an eye toward personalized cancer therapeutics. In personalized cancer therapeutics, DNA sequencing and the associated data analysis are an integral part of each therapy and are a required element of the regulatory submission to obtain marketing approval. In addition to achieving CLIA licensing, CAP accreditation, and New York state certification for our laboratory over several years, starting in early 2017, we also began working with the FDA on filing a Device Master File. Our Device Master File is a document focused on the technology, quality management, and validation of our platform, specifically focused on its use for the development of personalized cancer therapies. This detailed information is not shared with our customers, but with our permission they can reference our FDA file number in their IND filings. We also provide support if the FDA has questions on our Device Master File. A growing number of clinical trials from a growing number of biopharmaceutical companies have been approved by the FDA that reference our Device Master File. To our knowledge, we are the only company with such a track record.

NeXT anticipates future cancer biomarkers that will be identified by rapidly evolving science

Existing narrow cancer panels can become outdated when new genetic biomarkers are identified. Given the rapid pace at which new cancer biomarkers and biology are being elucidated, this will continue to be a growing problem.

By covering all genes, DNA and RNA, tumor and normal tissue, tumor and immune biology, our platform can readily accommodate many of the new genetic biomarkers and signatures as they are published. This capability also allows the data generated from our platform to continue to yield new therapeutic insights even as our understanding of cancer and immune biology evolves. For example, just in the past few years, with immunotherapy, new tumor resistance biomarkers, such as HLA, JAK1/JAK2, B2M, and tumor mutational burden, and new gene expression signatures correlating with response have been published. By design, our platform already included these genes when the biomarkers were discovered.

NeXT generates comprehensive, harmonized data across patients to enable large-scale database creation and insight

As cancer therapy development becomes increasingly data driven, large databases aggregating information for many patients can be mined for new biomarkers and new potential therapeutic targets. By enabling comprehensive, harmonized data to be collected across large numbers of cancer patients, NeXT is setting the stage for new large-scale databases with unprecedented richness of tumor and immune data for each patient. Personalis is starting to build internal databases based on NeXT called NeXT DB (see Figure 18), as well as enabling our biopharmaceutical customers to build their own databases based on NeXT. With NeXT, we expect to solve many of the major challenges confronting biopharmaceutical companies trying to build these databases. In particular, our ability to solve the problem of data heterogeneity is important because it allows for more effective data mining and enables machine learning applications needed to analyze patient data within and across trials.

We also see a longer-term opportunity to enhance the value of a comprehensive tumor genomics database. This may include integration with other sources of RWD, such as electronic health records, which can generate RWE that may be used to reduce risk in early discovery by helping to identify biomarkers of response, improve trial execution through external control arms, expand indications for therapy, reduce trial size, and improve trial design. In December 2018, the FDA published a framework for evaluating RWD and RWE for use in regulatory decisions. This includes the potential use of RWD and RWE by biopharmaceutical companies to provide additional support for drug product effectiveness, serve as an external control for clinical trials, and provide data for observational studies.

 

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Figure 18. Comprehensive genomic data for each sample can be structured and inputted into NeXT DB.

 

 

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NeXT Platform All DNA variants detected: SNPs, indels, CNAs All RNA variants detected: SNPs, fusions RNA gene & transcript expression VCF variant annotations HLA variants HLA alleles Neoantigens T-cell repertoire B-cell repertoire TMB Oncoviruses Broad tumor & immune biomarkers QC metrics including gene finishing Data input per sample NeXT DB

Our Platform Provides Value Across Many Therapeutic and Diagnostic Applications

We work closely with biopharmaceutical companies who are advancing new therapies in three major areas: immunotherapies, targeted therapies, and personalized cancer therapies. We have a critical role in generating new data and biological insights from patients in those clinical trials. We also see a long-term diagnostic opportunity for NeXT. Here, we describe some of the key products and applications of our platform.

Cancer Immunotherapy Applications

Over the prior decade, a number of drugs have been approved by the FDA based on the discovery that the immune system plays a key role in fighting cancer. Checkpoint inhibitors, a specific type of immunotherapy, generated worldwide sales of over $16.6 billion in 2018, up from approximately $1.4 billion in 2014. Despite the medical and commercial success of these drugs showing the transformational potential of immunotherapy, the majority of patients do not respond to immune checkpoint inhibitors. The explosion in immunotherapy clinical trials across different immunotherapy modalities has also seen major challenges. The development of new therapies in this category is challenged by difficulties understanding the precise interaction between cancer and the immune system.

Our NeXT product is the newest version of our ImmunoID Platform aimed at immunotherapy development in translational research and clinical trials. NeXT enables immunotherapy translational and clinical researchers to comprehensively analyze both a tumor and its immune microenvironment from a single limited tissue sample. These samples are typically tumor tissue samples coming from patients enrolled in clinical trials. Our NeXT Platform can be used to investigate key areas of tumor biology, from elucidating mechanisms of tumor escape and detecting neoantigens, to identifying novel biomarker signatures and characterizing the immune repertoire. Since our platform provides comprehensive insights on tumor and immune biology, including in both innate and adaptive immune cells, we believe it will enable drug companies to identify biomarkers of response, mechanisms of resistance, and better understand how immunotherapies are working in patients.

Our collaboration with Inova Health System, a non-profit health organization based in Virginia, demonstrates how immunotherapy developers could use our platform to identify potential mechanisms of resistance. In this study, we applied our platform to generate profiles of the patients’ tumors and to correlate those with the observed clinical responses. A cohort of the first 19 late-stage melanoma patients in this study were treated with anti-PD-1 checkpoint inhibitor immunotherapy. Consistent with prior research, the patients in our study with higher neoantigen burden were more likely to respond to checkpoint therapy, compared to those with lower neoantigen burden.

 

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Figure 19. Neoantigen burden versus response to PD-1 checkpoint inhibitors in 19 late-stage melanoma patients and putative tumor escape mechanisms of outliers.

 

 

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NeXT helps developers identify new biological mechanisms underlying therapeutic response and tumor resistance Non-responder patient with mutations identified in two MHC genes, which may have interfered with tumor neoantigen presentation to T-cell s, preventing an effective immune response Second non-responder patient identified with 82M mutation, a key part of the antigen presentation machinery Third patient had 1001 expression levels hundreds of times higher than the other patients in the cohort, which may have prevented T-cell activation through increased levels of immunosuppressive molecules

However, there were three outlier patients with high neoantigen burden whose response to checkpoint therapy was weaker than expected. Data from our platform helped provide putative mechanisms of tumor resistance. One patient had mutations in two MHC genes that may have caused this patient to be unable to properly present neoantigens found in the tumor to T-cells and thus prevented an effective immune response. A second non-responder patient had a mutation in the B2M gene which is a key part of the antigen presentation machinery. The third patient had expression levels of a gene called indoleamine 2,3-dioxygenase 1 (“IDO1”) that were hundreds of times higher than the other patients in the cohort. The high levels of IDO1 in this patient may have therefore prevented T-cell activation through increased levels of these immunosuppressive molecules. This study highlights how this type of data can help immunotherapy developers identify new biological mechanisms that may be responsible for variable response to therapy.

We also believe our NeXT liquid biopsy (in development) has a strong application in biopharmaceutical clinical trials. With coverage of approximately 20,000 genes compared to smaller liquid biopsy panels focused on roughly 50 to 500 genes, we believe our liquid biopsy approach will allow our customers to see biological changes when monitoring tumor response to therapy.

Targeted Cancer Therapies Applications

Another growing category of successful cancer treatments consists of therapies that target specific genes or molecular mechanisms of cancer. These drugs are not designed to influence the immune system directly, but the success of immunotherapies has brought acknowledgment that the immune system has a significant effect on their efficacy. These therapies have grown to represent a considerable share of the overall oncology therapeutics market today. Much like for immunotherapy, our ImmunoID NeXT Platform helps targeted therapy developers better understand each patient’s tumor and immune genomics more comprehensively, leading to insights that can help drive development of more successful therapies. We have customers developing solid tumor and hematological tumor-targeted therapies that are utilizing our platform as part of their drug development. We are positioning our company to be a leading provider of the detailed information that we believe will continue to drive targeted cancer therapy.

Personalized Cancer Therapy Applications

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

 

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are many potential approaches towards developing these therapies including neoantigen therapeutics, peptide-based vaccines, RNA and DNA vaccines, virally or bacterially encoded vaccines, and adoptive cell therapies, all of them benefit from the data and analytics that our platform can generate about a patient’s tumor. Given the more than 700,000 cancer patients projected to be diagnosed with late-stage disease in the United States in 2019, we estimate that the total addressable market for our data and analytics for personalized cancer therapy could reach as much as $20 billion in the United States and as much as $40 billion worldwide. See the section titled “Market, Industry, and Other Data” for additional information regarding the data, sources, and assumptions we used for this estimate. Many of our customers have leveraged our FDA Device Master File as a component of their IND filings with the FDA. We anticipate that if drugs are approved whose design and clinical trials involved the use of our platform, we may be able to derive revenue in connection with the sale of these drugs, including the data generation and information processing required to treat each patient.

We believe we are working with the majority of companies developing neoantigen-targeted personalized cancer therapies. We work with companies developing both neoantigen-based personalized vaccines and personalized cell therapies for patients. Our platform serves as the genomics engine for many of these companies to generate comprehensive information required to identify potential neoantigens which can be used in personalized therapies. In addition, we generate other genomic information potentially useful in their therapy design process (see Figure 20).

Figure 20. Our platform is the genomics engine for the majority of personalized therapy companies today.

 

 

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Cancer Patient Tumor Biopsy Tumor Sample Sequencing & Analytics Neoantigens & Immuno-genomics Synthesize PCV & ACT Targeting Neoantigens ImmunoID PCV & ACT Partners

Our platform helps address key challenges for our personalized therapy partners:

 

   

The ability to identify more potential neoantigens. With our platform, we use our proprietary technology to fill in sequencing gaps in genes so more neoantigens are detected. Furthermore we sequence approximately 20,000 genes to high depth in both DNA and RNA to increase sensitivity for mutations that can lead to neoantigens. We are also developing our NeXT liquid biopsy approach to identify additional and monitor existing neoantigens for personalized therapies.

 

   

The ability to better predict which putative neoantigens will trigger an immune response. We have developed an analytical pipeline that helps identify putative neoantigens by synthesizing data from our platform. We also have developed proprietary mass spectrometry data and machine learning algorithms that improve accuracy of neoantigen-to-MHC binding prediction.

 

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The ability to assess the MHC Class I and II HLA types for patients. We have designed our assay specifically to augment HLA regions to enable high-accuracy HLA typing, a key input into the neoantigen prediction process for personalized therapies. This allows some of our customers to avoid separate HLA testing for each patient in their trial, simplifying logistics, and reducing turnaround time.

 

   

Broad characterization of other tumor immunogenomic modifiers that can impact patient response. With our ImmungenomicsID report, we analyze both the DNA and RNA expression data for tumor and immune biomarkers that can inform the design of a personalized therapy.

 

   

High success rate on patient tumor samples. With our proprietary methods and processes, we have been able to achieve a high success rate with samples from our personalized therapy customers. This is particularly critical for these clinical trials because if the tumor molecular profiling fails, these patients cannot receive the personalized therapy.

 

   

Rapid turnaround time. The patients in clinical trials of these novel cancer therapeutics are often in the late-stages of disease. A therapy needs to be administered quickly to have the best chance of therapeutic benefit. This poses a challenge for personalized therapeutics. While a standard cancer therapy might be administered starting shortly after a patient is diagnosed, a personalized therapy will face a delay. This is the time required to obtain a sample from a patient, analyze the genetics of that individual tumor, and design, manufacture, and perform quality control on the therapy. Getting comprehensive tumor molecular profiling data from our platform is a key component of the overall time to personalized therapeutic delivery. With technology innovation, laboratory automation, and operational optimization, we have been able to achieve rapid turnaround time for our partners of less than two weeks in most cases, and for some in as few as seven days. Our ability to achieve rapid turnaround provides a large benefit to customers in this area.

 

   

Proactive approach with the FDA. Because the area of personalized therapy is still being defined from a regulatory standpoint, we have taken a proactive approach to working with the FDA. To enable our partners in this space, we have filed a Device Master File with the FDA that our customers can refer to in their IND submissions. This document details the technology underlying our platform as well as the validation that has been performed.

Diagnostic Applications

Over time, we also expect to work with our biopharmaceutical customers and research collaborators to build evidence of clinical utility for our platform as a diagnostic for advanced cancer therapies. We see a growing long-term diagnostic opportunity for NeXT as a one-stop, universal tumor molecular profiling test for cancer patients covering all of the approximately 20,000 human genes compared to the roughly 50 to 500 genes covered by many currently marketed panels. We are planning to release a diagnostic based on our NeXT Platform that we envision being used with biopharmaceutical and clinical partners. This product analyzes FFPE tumor samples with our NeXT Platform and returns a CLIA diagnostic report for physicians that details the therapeutic options for patient-based on the tumor mutations identified from our analysis of the sample. We also see this product as one that will help us build our internal NeXT database over time. We estimate that the total addressable market in the United States and the European Union for oncology clinical diagnostic testing was $14.4 billion in 2018. See the section titled “Market, Industry, and Other Data” for additional information regarding the data, sources, and assumptions we used for this estimate.

Commercialization Strategy

We commercialize our products in the United States and Europe through our targeted sales organization. In 2018, we derived substantially all of our revenues from our customers in the United States. Our sales representatives have extensive experience in enterprise/consultative selling in the genomics space. We augment this team with Ph.D.-level Field Application Specialists that provide deep understanding and expertise in the areas of oncology and genomics applications, ensuring top-quality pre- and post-sales customer support. Our

 

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commercial efforts are focused on demonstrating the value proposition of the NeXT Platform to biopharmaceutical customers with the goal of both increasing utilization of the product at existing accounts and to drive adoption in new targeted accounts. Our entire commercial organization promotes our ability to support biopharmaceutical customers across several application areas including biomarker discovery, new target discovery, therapy development, and treatment monitoring.

We anticipate that patients in clinical trials for cancer therapies will increasingly be tested pre-treatment and periodically afterwards to understand response to treatment in deep molecular detail, as their tumors evolve under therapeutic pressure. Although the majority of our revenues come from single time point testing, we believe our revenues from multiple time point testing will continue to grow. We also derive revenues from analysis of multiple customer samples from the same patient and time point to assess genetic differences between the primary tumor and metastases. Given the value of comprehensive genomic information from multiple time points or samples, we anticipate that our revenue, and the available market, will continue to grow.

As the clinical utility of advanced biomarkers is further established, we expect there to be a patient-centered diagnostic opportunity whereby some patients would be guided to personalized therapies. We believe that our platform’s ability to support biomarkers for a broad range of therapeutics positions us to be a leader in therapy selection for patients. We are currently developing this diagnostic and we anticipate launch, initially for use in biopharmaceutical clinical trials, in 2019.

Material Agreements

VA MVP Agreement

On September 28, 2017, we entered into a contract with the VA for the VA MVP to provide them with a combination of whole genome sequencing services (the “VA MVP Agreement”). The performance period for the services includes a base period of one year (September 2017 to August 2018), with three one-year renewal option periods that may be exercised upon discretion of the VA MVP (September 2018 to August 2019; September 2019 to August 2020; and September 2020 to August 2021). Each task order issued against the VA MVP Agreement has a separate period of performance and is subject to the terms and conditions of the VA MVP Agreement. Funds are obligated by the VA MVP under each task order based on actual needs.

All materials and samples utilized during the course of the VA MVP Agreement and all data first produced or delivered under the VA MVP Agreement are the sole property of the VA MVP. Under the VA MVP Agreement, we are subject to confidentiality and security obligations, as well as various obligations upon events of default.

The VA MVP may terminate the VA MVP Agreement, or any part thereof, at its sole convenience. Subject to the terms of the VA MVP Agreement, we shall be paid a percentage of the contract price reflecting the percentage of the work performed prior to the notice of termination, plus reasonable charges that we can demonstrate have resulted from the termination.

The VA MVP may terminate the VA MVP Agreement, or any part thereof, for cause in the event of any default by us, or if we fail to comply with any contract terms and conditions, or fail to provide the VA MVP, upon request, with adequate assurances of future performance. In the event of termination for cause, the VA MVP shall not be liable to us for any amount for supplies or services not accepted, and we shall be liable to the VA MVP for any and all rights and remedies provided by law. If it is determined that the VA MVP improperly terminated this contract for default, such termination shall be deemed a termination for convenience.

Agreements with Illumina

On March 21, 2017 we received a quotation for supply of genetic analysis products (the “Quote”) from Illumina. The Quote provided information as to the cost of five Illumina® Product Care NovaSeq®6000

 

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Comprehensive Plans and five NovaSeq™6000 Sequencing System instruments. The term of the Quote extended through March 31, 2017. On March 31, 2017, we submitted a purchase order to Illumina for five NovaSeq™6000 Sequencing System instruments, all of which we have received. On March 1, 2019, we received another quotation for supply of genetic analysis products (the “Second Quote”) from Illumina. The Second Quote provided information as to the cost of five NovaSeqTM6000 Sequencing System instruments. The term of the Second Quote extended through March 31, 2019. On March 20, 2019, we submitted a purchase order to Illumina for five NovaSeqTM6000 Sequencing System instruments, one of which we have received and four of which will be received on or before the due date of March 23, 2023.

On November 1, 2017, we entered into a master services subcontract agreement (the “Subcontract Agreement”) with Illumina. Under the terms of the Subcontract Agreement, we engaged Illumina as our subcontractor to perform certain genotyping services (the “Services”) on our behalf pursuant to written purchase orders in fulfillment of our VA MVP Agreement. The price for Illumina’s Services set forth in the Subcontract Agreement is effective through December 31, 2021, or later if the VA MVP Agreement is extended.

The Subcontract Agreement extends through the last day of the VA MVP Agreement, currently August 2021 but as may be extended, unless it is otherwise terminated early pursuant to its terms. All or part of the Subcontract Agreement may be terminated at our convenience in the event that the VA MVP terminates the VA MVP Agreement or terminates the part of the VA MVP Agreement that affects the Services provided by Illumina. Each party may terminate the Subcontract Agreement for default in the event that the other party materially fails to perform any of the provisions of the Subcontract Agreement, materially fails to make progress so as to endanger performance of the Subcontract Agreement in accordance with its terms, or becomes financially or legally incapable of completing the work and does not provide a plan of correction or recovery within the provided period of time to cure such failure. The Subcontract Agreement may be renewed for subsequent one-year terms as agreed by the parties subject to a four-year limit.

On November 22, 2017, we entered into a pricing agreement with Illumina. The pricing agreement provided pricing terms for the NovaSeq™ 5000/6000 S4 Reagent Kit (each, a “Kit”). On March 26, 2019, we entered into a new pricing agreement with Illumina, which replaced in its entirety the agreement dated November 22, 2017. The new pricing agreement has a purchase commitment of $1.7 million by June 30, 2019 to purchase these Kits. The term of the pricing agreement extends through December 31, 2022.

On December 13, 2017, we received a Fast Track genetic analysis services agreement (the “Services Agreement”) from Illumina that provides pricing information for the Infinium Global Screening Array V2.0 Fast Track Service. The term of the Services Agreement extends through June 30, 2019.

On February 22, 2019 we received a quotation for supply of genetic analysis products (the “Master Quote”) from Illumina that provides for additional pricing terms on Illumina products. The term of the Master Quote extends through February 14, 2020.

Competition

We provide a comprehensive, exome-scale analysis of both a tumor and its microenvironment, including the immune cells, from a single tissue sample.

Our primary competition comes from companies offering genomic profiling services for either the tumor or the immune microenvironment. These companies offer services that implement various technological approaches including next-generation sequencing and microarray analyses. These competitors include Guardant Health, Inc., Foundation Medicine, Inc., which was acquired by Roche Holdings, Inc. in July 2018, Roche Molecular Systems, Inc., NanoString Technologies, Inc., Personal Genome Diagnostics, Inc., and Adaptive Biotechnologies Corporation.

 

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Competitors within the broader genomics profiling space include laboratory companies such as Laboratory Corporation of America Holdings, Quest Diagnostics, Inc., Caris Life Sciences, Inc., Myriad Genetics, Inc., Tempus, Inc., InVitae Corp., BGI Group, Macrogen, Inc., Natera, Inc., Illumina, Thermo Fisher Scientific Inc., NeoGenomics, Inc., and MedGenome Inc. Additionally, several companies develop next-generation sequencing platforms that can be used for genomic profiling for biopharmaceutical research and development applications. These include Illumina, Thermo Fisher Scientific Inc., and other organizations that specialize in the development of next-generation sequencing instrumentation that can be sold directly to biopharmaceutical companies, clinical laboratories, and research centers. Separate from their instrumentation product lines, both Illumina and Thermo Fisher Scientific Inc., for example, currently market next-generation sequencing clinical oncology kits that are sold to customers who have bought and operate their respective sequencing instruments.

We believe that we compete favorably because of the integrity and comprehensiveness of the data generated by our NeXT Platform. Maximizing insights into both the tumor- and immune-related components of the tumor microenvironment is essential in identifying and understanding the reasons why certain cancer patients respond more favorably to oncology therapies than others. It is via access to such a comprehensive dataset for each patient that our customers can begin to discover new, clinically relevant biomarkers for the immunotherapy era, and ultimately improve cancer patient outcomes with the development of more efficacious therapeutics.

Intellectual Property

Protection of our intellectual property is fundamental to the long-term success of our business. Specifically, our success is dependent on our ability to obtain and maintain proprietary protection for our technology and the know-how related to our business, defend and enforce our intellectual property rights, and operate our business without infringing, misappropriating, or otherwise violating valid and enforceable intellectual property rights of others. We seek to protect our investments made into the development of our technology by relying on a combination of patents, trademarks, copyrights, trade secrets, know-how, confidentiality agreements and procedures, non-disclosure agreements with third parties, employee disclosure and invention assignment agreements, and other contractual rights.

Our patent strategy is focused on seeking coverage for our core technology, our ACE assay, and specific follow-on applications and implementations for enhancing sequencing coverage of certain genomic regions and analyzing cell-free nucleic acids. In addition, we file for patent protection on our ongoing research and development, particularly other novel assay technologies which may be applicable in cancer cases and other diseases.

Notwithstanding these efforts, we cannot be sure that patents will be granted with respect to any patent applications we have filed or may license or file in the future, and we cannot be sure that any patents we have or may be licensed or granted to us in the future, will not be challenged, invalidated, or circumvented, or that such patents will be commercially useful in protecting our technology. Moreover, we rely, in part, on trade secrets to protect aspects of our business that are not amenable to, or that we do not consider appropriate for, patent protection. However, trade secrets can be difficult to protect. While we take steps to protect and preserve our trade secrets, including by entering into confidentiality agreements with our employees, consultants, scientific advisors, and contractors, and maintaining physical security of our premises and physical and electronic security of our information technology systems, such measures can be breached, and we may not have adequate remedies for any such breach. In addition, our trade secrets may otherwise become known or be independently discovered by competitors. For more information regarding the risks related to our intellectual property, please see “Risk Factors—Risks Related to Our Intellectual Property.”

Our patent portfolio is comprised of patents and patent applications owned by the company. These patents and patent applications generally fall into four broad categories:

 

   

our ACE assay technology, including claims directed to methods for enriching sample nucleic acids based on differences in GC-content, molecular size, presence of genetic variations or rearrangements, epigenetic modifications, and species-origin (e.g., human and non-human);

 

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hybrid exome-genome technologies, including claims directed to methods for combining exome and genome sequencing data generated from a sample to identify polymorphisms;

 

   

liquid biopsy methods, including claims directed to methods of analyzing sequenced cell-free and leukocyte-derived nucleic acids in a blood sample to identify a tissue source, or recommend a drug treatment; and

 

   

clinical interpretation methods, including claims directed to methods of ranking genes associated with a phenotype and inheritance pattern.

As of May 9, 2019, we own ten issued U.S. and foreign patents in China and the United Kingdom and several pending U.S. and foreign patent applications. Issued U.S. patents in our portfolio of company-owned patents and patent applications are expected to expire between 2033 and 2035, excluding any additional term for patent term adjustments or patent term extensions.

Government Regulations

Federal and State Laboratory Licensing Requirements

Under the Clinical Laboratory Improvement Amendments of 1988 (“CLIA”), a laboratory is any facility that performs laboratory testing on specimens derived from humans for the purpose of providing information for the diagnosis, prevention or treatment of disease, or the impairment of or assessment of health. CLIA requires that a laboratory hold a certificate applicable to the type of laboratory examinations it performs and that it complies with, among other things, standards covering operations, personnel, facilities administration, quality systems and proficiency testing, which are intended to ensure, among other things, that clinical laboratory testing services are accurate, reliable and timely.

To renew our CLIA certificate, we are subject to survey and inspection every two years to assess compliance with program standards. Because we are a College of American Pathologists (“CAP”) accredited laboratory, the Centers for Medicare & Medicaid Services (“CMS”) does not perform this survey and inspection and relies on our CAP survey and inspection. We also may be subject to additional unannounced inspections. Laboratories performing high complexity testing are required to meet more stringent requirements than laboratories performing less complex tests. In addition, a laboratory that is certified as “high complexity” under CLIA may develop, manufacture, validate, and use proprietary tests referred to as laboratory developed tests (“LDTs”). CLIA requires analytical validation including accuracy, precision, specificity, sensitivity, and establishment of a reference range for any LDT used in clinical testing. The regulatory and compliance standards applicable to the testing we perform may change over time, and any such changes could have a material effect on our business.

CLIA provides that a state may adopt laboratory regulations that are more stringent than those under federal law, and a number of states have implemented their own more stringent laboratory regulatory requirements. State laws may require that nonresident laboratories, or out-of-state laboratories, maintain an in-state laboratory license to perform tests on samples from patients who reside in that state. As a condition of state licensure, these state laws may require that laboratory personnel meet certain qualifications, specify certain quality control procedures or facility requirements, or prescribe record maintenance requirements. Because our laboratory is located in the state of California, we are required to and do maintain a California state laboratory license. We also maintain licenses to conduct testing in other states where nonresident laboratories are required to obtain state laboratory licenses. We maintain a current license with the New York State Department of Health for our laboratory. Other states may currently have or adopt similar licensure requirements in the future, which may require us to modify, delay, or stop its operations in those states.

Failure to comply with CLIA certification and state clinical laboratory licensure requirements may result in a range of enforcement actions, including certificate or license suspension, limitation, or revocation, directed plan

 

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of action, onsite monitoring, civil monetary penalties, criminal sanctions, and revocation of the laboratory’s approval to receive Medicare and Medicaid payment for its services, as well as significant adverse publicity.

Regulatory framework for medical devices in the United States

Pursuant to its authority under the Federal Food, Drug and Cosmetic Act (the “FDC Act”), the FDA has jurisdiction over medical devices, which are defined to include, among other things, in vitro diagnostic devices (“IVDs”). The FDA regulates, among other things, the research, design, development, pre-clinical and clinical testing, manufacturing, safety, effectiveness, packaging, labeling, storage, recordkeeping, pre-market clearance or approval, adverse event reporting, marketing, promotion, sales, distribution, and import and export of medical devices. Unless an exemption applies, each new or significantly modified medical device we seek to commercially distribute in the United States will require either a premarket notification to the FDA requesting permission for commercial distribution under Section 510(k) of the FDC Act, also referred to as a 510(k) clearance, or approval from the FDA of a PMA. Both the 510(k) clearance and PMA processes can be resource intensive, expensive, and lengthy, and require payment of significant user fees.

FDA Regulation of Laboratory Developed Tests

Although the FDA regulates medical devices, including IVDs, the FDA has historically exercised its enforcement discretion and not enforced applicable provisions of the FDC Act and FDA regulations with respect to LDTs, which are a subset of IVDs that are intended for clinical use and developed, validated, and offered within a single laboratory for use only in that laboratory. We currently intend to market a diagnostic test based on the NeXT Platform as an LDT. As a result, we believe our diagnostic services are not currently subject to the FDA’s enforcement of its medical device regulations and the applicable FDC Act provisions.

Legislative and administrative proposals addressing oversight of LDTs were introduced in recent years and we expect that new legislative and administrative proposals will be introduced from time to time. It is possible that legislation could be enacted into law or regulations or guidance could be issued by the FDA, which may result in new or increased regulatory requirements for us to continue to offer our LDTs or to develop and introduce new tests as LDTs. For example, in 2014 the FDA issued two draft guidance documents proposing a risk-based framework with respect to applying the FDA’s oversight over LDTs. The framework guidance stated that the FDA intended to modify its policy of enforcement discretion with respect to LDTs in a risk-based manner consistent with the existing classification of medical devices. Thus, the FDA planned to begin to enforce its medical device requirements, including premarket submission requirements, on LDTs that have historically been marketed without FDA premarket review and oversight. In November 2016, the FDA announced its intention not to finalize the 2014 draft guidance to allow for further public discussion on an appropriate oversight approach to LDTs and to give congressional authorizing committees the opportunity to develop a legislative solution. In January 2017, the FDA issued a discussion paper on possible approaches to the regulation of LDTs.

Federal and State Fraud and Abuse Laws

We are subject to federal fraud and abuse laws such as the federal Anti-Kickback Statute (the “AKS”), the federal prohibition against physician self-referral (the “Stark Law”), and the federal false claims law, or the False Claims Act (the “FCA”). We are also subject to similar state and foreign fraud and abuse laws.

The AKS prohibits, among other things, knowingly and willfully offering, paying, soliciting, or receiving remuneration, directly or indirectly, overtly or covertly, in cash or in kind, in return for or to induce such person to refer an individual, or to purchase, lease, order, arrange for, or recommend purchasing, leasing, or ordering, any good, facility, item, or service that is reimbursable, in whole or in part, under a federal healthcare program.

The Stark Law and similar state laws, including California’s Physician Ownership and Referral Act, generally prohibit, among other things, clinical laboratories and other entities from billing a patient or any

 

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governmental or commercial payer for any diagnostic services when the physician ordering the service, or any member of such physician’s immediate family, has a direct or indirect investment interest in or compensation arrangement with us, unless the arrangement meets an exception to the prohibition.

Other federal fraud and abuse laws to which we are subject include, but are not limited to, the federal civil and criminal false claims laws including the FCA, which imposes liability on any person or entity that, among other things, knowingly presents, or causes to be presented, a false or fraudulent claim for payment to the federal government, and the federal Civil Monetary Penalties Law, which prohibits, among other things, the offering or transfer of remuneration to a Medicare or state healthcare program beneficiary if the person knows or should know it is likely to influence the beneficiary’s selection of a particular provider, practitioner, or supplier of services reimbursable by Medicare or a state healthcare program, unless an exception applies. Under the FCA, private citizens can bring claims on behalf of the government through qui tam actions. We must also operate within the bounds of the fraud and abuse laws of the states in which we do business which may apply to items or services reimbursed by non-governmental third-party payers, including private insurers.

Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs. If our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, imprisonment, exclusion from government-funded healthcare programs, such as Medicare and Medicaid, disgorgement, contractual damages, reputational harm, diminished profits and future earnings, additional reporting, or oversight obligations if we become subject to a corporate integrity agreement or other agreement to resolve allegations of non-compliance with the law and the curtailment or restructuring of our operations. If any of the physicians or other healthcare providers or entities with whom we do business is found to be not in compliance with applicable laws, they may be subject to significant criminal, civil or administrative sanctions, including exclusions from government-funded healthcare programs.

HIPAA and HITECH

Under the administrative simplification provisions of the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), as amended by the Health Information Technology for Economic and Clinical Health Act “HITECH”), the U.S. Department of Health and Human Services (“HHS”) issued regulations that establish uniform standards governing the conduct of certain electronic healthcare transactions and requirements for protecting the privacy and security of protected health information (“PHI”), used or disclosed by covered entities and business associates. Covered entities and business associates are subject to HIPAA and HITECH. Our subcontractors that create, receive, maintain, transmit, or otherwise process PHI on behalf of us are HIPAA “business associates” and must also comply with HIPAA as a business associate.

HIPAA and HITECH include privacy and security rules, breach notification requirements, and electronic transaction standards.

The Privacy Rule covers the use and disclosure of PHI by covered entities and business associates. The Privacy Rule generally prohibits the use or disclosure of PHI, except as permitted under the Rule. The Privacy Rule also sets forth individual patient rights, such as the right to access or amend certain records containing his or her PHI, or to request restrictions on the use or disclosure of his or her PHI.

The Security Rule requires covered entities and business associates to safeguard the confidentiality, integrity, and availability of electronically transmitted or stored PHI by implementing administrative, physical, and technical safeguards. Under HITECH’s Breach Notification Rule, a covered entity must notify individuals, the Secretary of the HHS, and in some circumstances, the media of breaches of unsecured PHI.

In addition, we may be subject to state health information privacy and data breach notification laws, which may govern the collection, use, disclosure, and protection of health-related and other personal information.

 

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California, for example, has enacted the Confidentiality of Medical Information Act, which sets forth standards in addition to HIPAA and HITECH with which all California health care providers like us must abide. State laws may be more stringent, broader in scope, or offer greater individual rights with respect to PHI than HIPAA, and state laws may differ from each other, which may complicate compliance efforts.

Entities that are found to be in violation of HIPAA as the result of a failure to secure PHI, a complaint about our privacy practices or an audit by HHS, may be subject to significant civil and criminal fines and penalties and additional reporting and oversight obligations if such entities are required to enter into a resolution agreement and corrective action plan with HHS to settle allegations of HIPAA non-compliance.

U.S. Healthcare Reform

In the United States, there have been a number of legislative and regulatory changes at the federal and state levels that seek to reduce healthcare costs and improve the quality of healthcare. For example, in March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (collectively, the “ACA”), became law. This law substantially changed the way health care is financed by both commercial payers and government payers, and significantly impacted our industry. The ACA contained a number of provisions expected to impact the clinical laboratory industry, such as changes governing enrollment in state and federal health care programs, reimbursement changes, and fraud and abuse.

Some of the provisions of the ACA have yet to be implemented, and there have been judicial and Congressional challenges to certain aspects of the ACA, as well as recent efforts by the Trump administration to repeal or replace certain aspects of the ACA. Since January 2017, President Trump has signed two executive orders and other directives designed to delay the implementation of certain provisions of the ACA. Concurrently, Congress has considered legislation that would repeal or repeal and replace all or part of the ACA. While Congress has not passed comprehensive repeal legislation, it has enacted laws that modify certain provisions of the ACA such as removing penalties, starting January 1, 2019, for not complying with the ACA’s individual mandate to carry health insurance and delaying the implementation of certain ACA-mandated fees. On December 14, 2018, a Texas U.S. District Court Judge ruled that the ACA is unconstitutional in its entirety because the “individual mandate” was repealed by Congress as part of the Tax Cuts and Jobs Act of 2017. While the Texas U.S. District Court Judge, as well as the Trump administration and CMS, have stated that the ruling will have no immediate effect pending appeal of the decision, it is unclear how this decision, subsequent appeals, and other efforts to repeal and replace the ACA will impact the ACA.

We anticipate there will continue to be proposals by legislators at both the federal and state levels, regulators and commercial payers to reduce costs while expanding individual healthcare benefits. Certain of these changes could impose additional limitations on the prices we will be able to charge for our tests, the coverage of or the amounts of reimbursement available for our tests from payers, including commercial payers and government payers.

Our Employees

As of March 31, 2019, we had 147 full-time employees, with 64 in research and development, 47 in laboratory operations, 19 in commercial operations and 17 in general and administrative functions. Of these full-time employees, 144 are located in the United States (including 135 who work at our corporate headquarters in Menlo Park, California and 9 who work remotely) and three are located in the United Kingdom and Germany. As of March 31, 2019, more than 60 of our full-time employees had completed a Ph.D. or other advanced science or medical degree.

None of our employees is represented by a labor union or covered by collective bargaining agreements, and we have not experienced any work stoppages. We consider our relations with our employees to be good.

 

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Our Facilities

Our corporate headquarters are located in Menlo Park, California, and comprise approximately 31,280 square feet of space, pursuant to an operating lease that expires in 2020. This lease includes an option to extend for an additional three years, at market rates that prevail at the time of our election to extend. Our CLIA-certified laboratory is located in this facility.

We believe that this facility is sufficient to meet our current needs. We also believe we will be able to obtain additional space, as needed, on commercially reasonable terms.

Legal Proceedings

From time to time, we are involved in various legal proceedings arising from the normal course of business activities. We are not presently a party to any litigation the outcome of which, we believe, if determined adversely to us, would individually or taken together have a material adverse effect on our business, operating results, cash flows, or financial condition. Defending such proceedings is costly and can impose a significant