PERSONALIS, INC. Management report and analysis of the financial situation and operating results. (Form 10-Q)

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The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our condensed consolidated
financial statements and the related notes and other financial information
included elsewhere in this Quarterly Report on Form 10-Q and our Annual Report
on Form 10-K for the fiscal year ended December 31, 2021 filed with the
Securities and Exchange Commission (the "SEC") on February 24, 2022 (the "Annual
Report"). In addition to historical consolidated financial information, the
following discussion contains forward-looking statements that reflect our plans,
estimates, and beliefs. Our actual results could differ materially from those
discussed in the forward-looking statements. You should review the sections
titled "Special Note Regarding Forward-Looking Statements" for a discussion of
forward-looking statements and in Part II, Item 1A, "Risk Factors" for a
discussion of factors that could cause actual results to differ materially from
the results described in or implied by the forward-looking statements contained
in the following discussion and analysis and elsewhere in this Quarterly Report
on Form 10-Q and in our Annual Report.

Insight

Personalis' strategy is to develop some of the world's most advanced genetic
tests for cancer. Today our tests are routinely used by many of the largest
oncology-focused pharmaceutical companies for analysis of patient samples from
their clinical trials. More recently, we have also begun to work with a growing
number of leading cancer centers for clinical diagnostic use of our tests. We
believe that adoption and publication by these key opinion leaders will advance
standard of care for cancer patients and drive eventual broad use clinically. We
believe that our tests can meaningfully improve outcomes for cancer patients,
and estimate that an annual market opportunity of approximately $30 billion
could materialize in the U.S. in the future.

Recent updates specific to our planned entry into the clinical diagnostics market follow in the next four paragraphs.

In December 2021, we launched NeXT Personal, a next-generation, liquid biopsy
test designed to detect and quantify minimal residual disease ("MRD") and
recurrence in patients previously diagnosed with cancer. NeXT Personal is
designed to deliver industry-leading MRD sensitivity down to the 1
part-per-million range, an approximately 10- to 100-fold improvement over other
available technologies. NeXT Personal leverages whole genome sequencing of a
patient's tumor to identify up to 1,800 specially-selected somatic variants that
are subsequently used to create a personalized liquid biopsy panel for each
patient. We believe this enables earlier detection across a broader variety of
cancers and stages, including typically challenging early stage, low mutational
burden, and low-shedding cancers. NeXT Personal is also designed to
simultaneously detect and quantify clinically relevant mutations in ctDNA that
may be used in the future to help guide therapy, when cancer is detected. These
include known targetable cancer mutations, drug resistance mutations, and new
variants which can emerge and change over time, especially under therapeutic
pressure. We consider this approach not just "tumor-informed", but
"comprehensively tumor-informed". Our ultimate goal is not just to detect
cancer, but to provide key information that is actionable by oncologists over
the entire course of the patient's disease. We believe this can be better for
patients, more informative for pharmaceutical customers, and a larger business
opportunity for us. NeXT Personal is currently available as a research use only
("RUO") test and has not yet been validated as a laboratory developed test
("LDT"). In other words, NeXT Personal is not yet offered directly to cancer
patients. Certain pharmaceutical customers have ordered NeXT Personal as an RUO
test and we have generated revenue upon delivery of these tests.

Early in 2020, we launched NeXT Dx Test, a comprehensive genomic solid tumor
test that enables physicians to identify potential therapies, evidence of drug
resistance, and clinical trial options for cancer patients. Our NeXT Dx Test is
one of the first cancer diagnostic platforms to profile approximately 20,000
genes in both the tumor exome and transcriptome, providing a comprehensive
genomic testing solution that goes beyond many existing cancer diagnostic panels
that focus on a few hundred genes. The NeXT Dx Test includes advanced analytics
to provide a diagnostic report on genetic alterations in medically important
cancer genes, as well as emerging immunotherapy composite biomarkers of medical
importance. Immunotherapy-related biomarkers such as microsatellite instability
("MSI") status and tumor mutational burden ("TMB") are included in the clinical
report. We are currently in the process of completing a validation study on an
updated version of NeXT Dx as a clinical test and anticipate revenue from this
test in the second half of 2022. We plan to submit data to the Palmetto MolDx
technology assessment process and anticipate a favorable reimbursement ruling
from MolDx in early 2023.

An important component of our commercial strategy is to work with world-class
medical institutions. To that end, in the fourth quarter of 2021, we announced a
collaboration with the Mayo Clinic and in the first quarter of 2022, we
announced one with the Moores Cancer Center at UC San Diego Health. We entered
these collaborations to provide clinical diagnostic testing and analysis
services using our tissue-based NeXT Dx Test and may also use our liquid biopsy
NeXT Personal test in the future. We have begun to test clinical patient samples
from the Moores Cancer Center at UC San Diego Health, and are excited about the
opportunity to work with these renowned cancer centers. Given the advanced
nature of our NeXT Dx Test, we believe it is a good fit for high-end cancer
centers, which have a dual mandate for both clinical care and research. If these
key opinion leaders have a positive experience using our tests, we are
optimistic that this will also support broader use of our platform by other
clinicians in the future.

Additionally, we have initiated the hiring of a national clinical sales force
that plans to actively engage with oncologists and surgeons at academic medical
centers and community oncology practices. We also have begun building out
critical support functions for our clinical testing business, such as customer
service and billing.

We have the capacity to sequence and analyze approximately 200 trillion bases of
DNA per week in our facility. We believe that capacity is already larger than
most cancer genomics companies, and we continue to build automation and other
infrastructure to

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scale further as demand increases and to support our NeXT Liquid Biopsy, NeXT Dx Test and NeXT Personal offerings. To date, we have sequenced over 260,000 human samples, of which over 150,000 were whole human genomes.

In parallel with the development of our platform technology, we have also
pursued business within the population sequencing market, and we have provided
whole genome sequencing services under contract with the U.S. Department of
Veterans Affairs Million Veteran Program (the "VA MVP"), which has enabled us to
innovate, scale our operational infrastructure, and achieve greater efficiencies
in our lab. The VA MVP is the largest population sequencing effort in the United
States and we have delivered over 150,000 whole human genome sequence datasets
to the VA MVP to date. The cumulative value of orders received from the VA MVP
since inception is $185.7 million, all of which we had recognized as revenue as
of June 30, 2022. In September 2021, we received a task order from the VA MVP
with a value of $9.7 million, which was significantly less than in prior years.
At that time, we expected the reduced order amount to be followed by a formal
request for proposal ("RFP") process and a potential new contract to be awarded
sometime late in the third quarter of 2022. We are aware that the VA MVP
recently initiated a request for information process seeking potential sources
to provide high-throughput whole genome sequencing services, and that the VA MVP
more recently issued a pre-solicitation notice announcing its intent to award a
firm-fixed price, requirements contract for such services. However, we are not
certain whether there will be a RFP process in 2022, and the pre-solicitation
notice does not obligate the VA MVP to issue a solicitation for proposals this
year.

In August 2021, we announced that we will relocate our corporate headquarters
from Menlo Park to a new facility in Fremont, California. We plan to begin
moving into the new facility in the third quarter of this year. We signed a
13.5-year lease for the 100,000 square foot facility, which is approximately
double the amount of space in our current Menlo Park location. The new facility
is intended to allow for expansion of our laboratory for clinical testing to
support biopharma customers, clinical diagnostic testing and pursuit of U.S.
Food and Drug Administration (the "FDA") approval for our tests. In addition,
the new space is intended to support the expansion of research and development
efforts to bring leading edge products and services to the marketplace. The new
facility will also provide more office space for our selling, general and
administrative workforce.

Our operations have been impacted, and may be impacted in the future, by the
ongoing COVID-19 pandemic. For example, the previous shelter-in-place order and
health orders negatively impacted productivity, disrupted our business, and
slowed research and development activities due to limited access to our
laboratory space that would otherwise be used by our research and development
group, and, to the extent such orders return in similar or more stringent form,
they may continue to cause such effects on our operations. The COVID-19 pandemic
has also disrupted, and may disrupt in the future, the ability of our suppliers
to fulfill our purchase orders in a timely manner or at all. Additionally, we
are aware of increased demand in the market for certain consumables used in
COVID-19 test kits and vaccines. We use such consumables in our operations, and
we have faced, and may face in the future, difficulties in acquiring such
consumables if our suppliers prioritize orders related to COVID-19. Several of
our customers have been delayed in sending us samples due to the inability to
collect or ship samples during the COVID-19 pandemic, and these and additional
customers may be disrupted from collecting samples or sending purchase orders
and samples to us in the future.

While authorities in many areas have lifted or relaxed pandemic-related
restrictions, in some cases they have subsequently re-imposed various
restrictions after observing an increased rate of COVID-19 cases as the global
COVID-19 pandemic continues to evolve and to present serious health risks. There
is no guarantee when or if all such restrictions and recommendations will be
eliminated, such that we and our customers, manufacturers and suppliers will be
able to safely resume operations consistent with our pre-COVID-19 operations.
The full extent of the impact of the COVID-19 pandemic on our business,
operations and plans remains uncertain and will depend on future developments
that cannot be predicted at this time. Such developments include the continued
spread of the Omicron variant and subvariants in the U.S. and other countries
and the potential emergence of other SARS-CoV-2 variants or subvariants that may
prove especially contagious or virulent, the ultimate duration of the pandemic
and the resulting impact on our business and other third parties with whom we do
business, and the effectiveness of actions taken globally to contain and treat
the disease.

Components of operating results

Revenue

We derive our revenue primarily from sequencing and data analysis services to
support the development of next-generation cancer therapies and to support
large-scale genetic research programs. We support our customers by providing
high-accuracy, validated genomic sequencing tests with 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 revenue is primarily generated through contracts with companies in the
pharmaceutical industry, healthcare organizations, and government entities. Our
ability to increase revenue will depend on our ability to further penetrate this
market. To do this, we are developing a growing set of state-of-the-art services
and products, advancing our operational infrastructure, expanding our
international presence, building our regulatory credentials, and expanding our
targeted marketing efforts. We sell through a small direct sales force. We also
anticipate increasing our revenue in the future through entrance into the
clinical diagnostics market and have begun building our regulatory, clinical,
and reimbursement capabilities, including hiring a national clinical sales
force.

Since 2018, we have derived a substantial portion of our revenue from sales of
our DNA sequencing and data analysis services to the VA MVP. However, we
currently do not anticipate deriving such substantial portions of our revenue
from the VA MVP going forward.

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

Costs and Expenses

Cost of Revenue

Cost of revenue consists of raw materials costs, personnel costs (salaries,
bonuses, stock-based compensation, payroll taxes, and benefits), laboratory
supplies and consumables, depreciation and maintenance on equipment, and
allocated facilities and information technology ("IT") costs. We expect cost of
revenue to increase as our revenue grows, and in the short term cost of revenue
may outpace revenue growth as we invest in expanding our laboratory capacity,
including additional costs associated with our future laboratory in Fremont,
California. Over time the cost per sample processed is expected to decrease due
to economies of scale we may gain as volume increases, automation initiatives,
and other cost reductions.

Research and development costs

Research and development expenses consist of costs incurred for the research and
development of our services and products and costs related to conducting studies
and collaborations with partners to validate the clinical utility of our
offerings. These expenses consist primarily of personnel costs (salaries,
bonuses, stock-based compensation, payroll taxes, and benefits), laboratory
supplies and consumables, costs of processing samples for research purposes,
depreciation and maintenance on equipment, and allocated facilities and IT
costs. We include in research and development expenses the costs to further
develop software we use to operate our laboratory, analyze the data it
generates, and automate our operations.

We expense our research and development costs in the period in which they are incurred. We plan to increase our research and development spending as we continue to develop new services and products and expand collaborations for clinical validation to secure reimbursement opportunities.

Selling, general and administrative expenses

Selling expenses consist of personnel costs (salaries, commissions, bonuses,
stock-based compensation, payroll taxes, and benefits), customer support
expenses, direct marketing expenses, and market research. Our general and
administrative expenses include costs for our executive, accounting, finance,
legal, and human resources functions. These expenses consist of personnel costs
(salaries, bonuses, stock-based compensation, payroll taxes, and benefits),
corporate insurance, audit and legal expenses, consulting costs, and allocated
facilities and IT costs. We expense all selling, general and administrative
costs as incurred.

We expect our selling expenses will continue to increase in absolute dollars,
primarily driven by our efforts to expand our commercial capability and to
expand our brand awareness and customer base through targeted marketing
initiatives with an increased presence both within and outside the United
States. We expect general and administrative expenses to increase as we scale
our operations and incur additional costs associated with ramping up our new
headquarters facility in Fremont, California.

Interest income and interest expense

Interest income consists primarily of interest earned on our cash and cash equivalents and short-term investments. Interest expense in 2022 corresponds to the recognition of notional interest on non-interest bearing loans.

Other income (expenses), net

Other income (expense), net, primarily includes foreign exchange gains and losses and realized gains or losses associated with sales of marketable securities. We expect that our foreign exchange gains and losses will continue to fluctuate in the future due to changes in exchange rates.

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Operating results

The following sets forth, for the periods presented, our unaudited condensed
consolidated statements of operations and selected financial data (in thousands,
except share and per share data):

                                             Three Months Ended June 30,    

Semester completed June 30th,

                                                2022               2021             2022              2021
Revenue                                    $        18,240     $     21,670     $      33,467     $     42,551
Costs and expenses
Cost of revenue                                     13,959           13,502            24,908           26,956
Research and development                            16,288           11,687            33,386           21,183
Selling, general and administrative                 15,874           11,428            31,360           21,849
Total costs and expenses                            46,121           36,617            89,654           69,988
Loss from operations                               (27,881 )        (14,947 )         (56,187 )        (27,437 )
Interest income                                        349              103               493              198
Interest expense                                       (50 )            (65 )            (109 )            (65 )
Other income (expense), net                             50              (36 )              69              (48 )
Loss before income taxes                           (27,532 )        (14,945 )         (55,734 )        (27,352 )
Provision for income taxes                              14                8                21                5
Net loss                                   $       (27,546 )   $    (14,953 )   $     (55,755 )   $    (27,357 )
Net loss per share, basic and diluted      $         (0.60 )   $      (0.34 )   $       (1.23 )   $      (0.63 )
Weighted-average shares outstanding,
basic and diluted                               45,637,838       43,960,794        45,316,795       43,113,195



                                                         June 30, 2022       December 31, 2021
Cash and cash equivalents, and short-term investments   $       233,490     $           287,064
Working capital                                                 218,534                 286,918
Total assets                                                    357,979                 396,528
Total debt                                                        1,745                   3,494
Long-term obligations                                            51,841                  54,914
Total liabilities                                                93,347                  86,227
Total stockholders' equity                                      264,632                 310,301


Revenue

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

                                Three Months Ended June 30,           Change           Six Months Ended June 30,           Change
                                 2022                 2021                             2022                2021
VA MVP                      $        4,055       $       13,507       (70%)        $       7,556       $      26,717       (72%)
All other customers                 14,185                8,163        74%                25,911              15,834        64%
Total revenue               $       18,240       $       21,670       (16%)        $      33,467       $      42,551       (21%)


The following table shows the revenue concentration by customer:

                                                 Three Months Ended June 30,                  Six Months Ended June 30,
                                               2022                      2021              2022                      2021
Natera, Inc.                                    38%                        *                33%                        *
VA MVP                                          22%                       62%               23%                       63%
Pfizer Inc.                                      *                        15%                *                        14%
* Less than 10% of revenue



VA MVP

The decreases of $9.5 million and $19.2 million in revenue from the VA MVP in
the second quarter and first six months of 2022, respectively, compared to the
same periods in 2021 were primarily due to a decrease in the volume of samples
we tested in these periods. As of June 30, 2022, we have fulfilled all orders
received from the VA MVP under the existing contract.

The recognition of significant revenue from the VA MVP in future periods is
contingent on receipt of a new contract with the VA MVP and it may not award us
a new contract. Further, the value of any such potential new contract may be
lower than our historical contracted orders and/or the scope or nature of the
services required under any new contract may change such that we are unable to
serve the VA MVP in the future. The most recent order received from the VA MVP
in September 2021 had a value of $9.7 million, which represented a substantial
decline compared to orders received prior to that point. At that time, we
expected the reduced order amount

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to be followed by a formal RFP process and a potential new contract to be
awarded sometime late in the third quarter of 2022. We are aware that the VA MVP
recently initiated a request for information process seeking potential sources
to provide high-throughput whole genome sequencing services, and that the VA MVP
more recently issued a pre-solicitation notice announcing its intent to award a
firm-fixed price, requirements contract for such services. However, we are not
certain whether there will be a RFP process in 2022, and the pre-solicitation
notice does not obligate the VA MVP to issue a solicitation for proposals.

All other customers

The increase of $6.0 million in revenue from all other customers in the second
quarter of 2022 compared to the second quarter of 2021 was driven primarily by
an increase of $6.5 million in revenue from Natera, Inc. ("Natera") due to
increased sample receipts under our agreement to provide advanced tumor analysis
for use in Natera's MRD testing offerings. This increase was partially offset by
a $0.5 million decline in revenue from our pharmaceutical customers due to lower
sample receipts during the quarter. Revenue derived from our NeXT Platform
services and products, which includes revenue from Natera, was $10.9 million in
the second quarter of 2022, compared to $5.0 million in the second quarter of
2021, an increase of $5.9 million.

The increase of $10.1 million in revenue from all other customers during the
first six months of 2022 compared to the same period in 2021 was driven
primarily by an increase of $10.4 million in revenue from Natera due to
increased sample receipts during the period, partially offset by a $0.3 million
decline in revenue from our pharmaceutical customers due to lower sample
receipts during the period. Revenue derived from our NeXT Platform products,
which includes revenue from Natera, was $18.7 million in the first six months of
2022, compared to $9.3 million in the first six months of 2021, an increase of
$9.4 million.

Costs and Expenses

                                Three Months Ended June 30,           Change           Six Months Ended June 30,           Change
                                 2022                 2021                             2022                2021
                                      (in thousands)                                        (in thousands)
Cost of revenue             $       13,959       $       13,502         3%  

$24,908 $26,956 (8%) Research and development

            16,288               11,687        39%                33,386              21,183        58%
Selling, general and                                                   39%                                                  44%
administrative                      15,874               11,428                           31,360              21,849

Total costs and expenses $46,121 $36,617 26%

       $      89,654       $      69,988        28%



Cost of revenue

The $0.5 million increase in cost of revenue in the second quarter of 2022
compared to the second quarter of 2021, despite lower revenue, was primarily due
to higher fixed laboratory costs, including labor, equipment, and facilities
costs. Higher indirect supplies costs also contributed to the increase as Natera
and pharmaceutical customer orders require more supplies to process as compared
to VA MVP orders. Specific components of the increase were a $1.2 million
increase in laboratory supplies and consumables, a $0.8 million increase in
labor costs due to higher headcount, a $0.7 million increase in depreciation and
maintenance on lab equipment, and a $0.2 million increase in other costs,
partially offset by a $2.4 million decrease in direct material costs due to a
more favorable mix of customer orders during the period.

The $2.0 million decrease in cost of revenue in the first six months of 2022
compared to the same period in 2021 was primarily due to lower levels of
revenue, partially offset by higher fixed laboratory costs, including labor,
equipment, and facilities costs. Higher indirect supplies costs also contributed
to the increase as Natera and pharmaceutical customer orders require more
supplies to process as compared to VA MVP orders. Specific components of the
decrease were a $6.0 million decrease in direct material costs due to lower
revenue levels and a more favorable mix of customer orders during the period, a
$1.0 million decrease in costs due to greater usage of our laboratory capacity
for research and development activities, partially offset by a $2.0 million
increase in labor costs due to higher headcount, a $1.8 million increase in
laboratory supplies and consumables, and a $1.2 million increase in depreciation
and maintenance on lab equipment.

Research and development

The increases of $4.6 million and $12.2 million research and development expenses in the second quarter and first half of 2022, respectively, compared to the same periods in 2021, were mainly due to the development of new services and products, increased hiring to build our clinical and medical infrastructure and the cost of sample testing for clinical validation work.

Specific components of the $4.6 million increase in the second quarter of 2022
compared to the second quarter of 2021 were a $2.5 million increase in
personnel-related costs primarily related to increased headcount, a $0.8 million
increase in sample processing costs incurred in our laboratory for new service
and product development, a $0.8 million increase in IT and fixed facilities
costs, and a $0.5 million increase in depreciation and maintenance on research
and development equipment.

Specific components of the $12.2 million increase in the first six months of
2022 compared to the same period in 2021 were a $6.4 million increase in
personnel-related costs primarily related to increased headcount, a $3.4 million
increase in sample processing

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costs incurred in our laboratory for new service and product development, a $1.6
million increase in IT and fixed facilities costs, a $0.6 million increase in
depreciation and maintenance on research and development equipment, and a $0.2
million increase in other costs.

Selling, general and administrative expenses

The increases of $4.4 million and $9.5 million selling, general and administrative expenses in the second quarter and first half of 2022, respectively, compared to the same periods in 2021, were primarily due to the expansion of our commercial and clinical diagnostic teams.

Specific components of the $4.4 million increase in the second quarter of 2022
compared to the second quarter of 2021 were a $2.1 million increase in
personnel-related costs related to increased headcount, a $1.3 million increase
in facilities costs driven by our new Fremont facility, a $0.7 million increase
in professional services (including corporate insurance, audit fees, and legal
expenses), and a $0.3 million increase in other sales-related activities such as
travel.

Specific components of the $9.5 million increase in the first six months of 2022
compared to the same period in 2021 were a $4.9 million increase in
personnel-related costs related to increased headcount, a $2.7 million increase
in facilities costs driven by our new Fremont facility, and a $1.9 million
increase in professional services (including corporate insurance, audit fees,
and legal expenses).

Interest income, interest expense and other income (expenses), net

                                  Three Months Ended June 30,           Change           Six Months Ended June 30,           Change
                                  2022                  2021                              2022                 2021
Interest income               $         349         $         103        239%        $          493         $      198        149%
Interest expense                        (50 )                 (65 )     (23%)                  (109 )              (65 )      68%
Other income (expense), net              50                   (36 )                              69                (48 )
Total                         $         349         $           2                    $          453         $       85

Interest income and interest expense

The increases in interest income in the second quarter and first six months of
2022 compared to the same periods in 2021 were due to increased yields on our
investments. Interest expense in all periods presented was the recognition of
imputed interest on noninterest bearing loans.

Other income (expenses), net

Other income (expense), net during the periods presented, consisted mainly of foreign currency revaluations.

Cash and capital resources

The following tables present selected financial information and cash flow information (in thousands):

                                                         June 30, 2022       December 31, 2021
Cash and cash equivalents, and short-term investments   $       233,490     $           287,064
Property and equipment, net                                      47,585                  19,650
Contract liabilities                                                356                   3,982
Working capital                                                 218,534                 286,918



                                                        Six Months Ended June 30,
                                                          2022               2021
Net cash used in operating activities                 $     (38,706 )     $  (37,674 )
Net cash provided by (used in) investing activities          19,860         (129,649 )
Net cash provided by financing activities                        95         

168,859


From our inception through June 30, 2022, we have funded our operations
primarily from $279.0 million in net proceeds from our follow-on equity
offerings in August 2020 and January 2021, $144.0 million in net proceeds from
our IPO in June 2019, and $89.6 million from issuance of redeemable convertible
preferred stock, as well as cash from operations and debt financings. As of June
30, 2022, we had cash and cash equivalents of $86.7 million and short-term
investments of $146.8 million.

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

We have based these future funding requirements on assumptions that may prove to
be wrong, and we could utilize our available capital resources sooner than we
expect. If our available cash balances and anticipated cash flow from operations
are

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insufficient to satisfy our liquidity requirements, including because of lower
demand for our services or other risks described in this Quarterly Report on
Form 10-Q, such as the ongoing COVID-19 pandemic, we may seek to sell additional
common or preferred equity or convertible debt securities, enter into an
additional credit facility or another form of third-party funding or seek other
debt financing. We filed a prospectus supplement in January 2022 pursuant to
which we could offer and sell additional shares of our common stock up to an
aggregate amount of $100.0 million through an at-the-market offering program.
The sale of equity and convertible debt securities may result in dilution to our
stockholders and, in the case of preferred equity securities or convertible
debt, those securities could provide for rights, preferences or privileges
senior to those of our common stock. 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.

Our short-term investment portfolio is primarily invested in highly rated securities, with the primary aim of minimizing the potential risk of loss of capital. Our investment policy generally requires securities to be of high quality and limits the degree of credit exposure to any given issuer.

As of June 30, 2022, cash and cash equivalents held by foreign subsidiaries was
$1.8 million. Our intent is to indefinitely reinvest funds held outside the
United States and our current plans do not demonstrate a need to repatriate them
to fund our domestic operations. However, if in the future, we encounter a
significant need for liquidity domestically or at a particular location that we
cannot fulfill through borrowings, equity offerings, or other internal or
external sources, or the cost to bring back the money is not significant from a
tax perspective, we may determine that cash repatriations are necessary or
desirable. Repatriation could result in additional material taxes. These factors
may cause us to have an overall tax rate higher than other companies or higher
than our tax rates have been in the past.

During the six months ended June 30, 2022, cash used in operating activities of
$38.7 million was a result of $55.8 million of net loss, partially reduced by
non-cash expenses of $15.8 million (the most significant non-cash expenses were
$9.2 million of stock-based compensation and $3.6 million depreciation and
amortization) and a net positive change in working capital of $1.3 million (of
which $5.6 million was due to collections of accounts receivable).

During the six months ended June 30, 2022, cash provided by investing activities
was $19.9 million due to $33.3 million of net proceeds from short-term
investments and $5.5 million cash receipts in connection with our Fremont
facility lease incentives, partially offset by $18.9 million in property and
equipment purchases. Cash provided by financing activities of $0.1 million
during the same period consisted of $1.0 million proceeds from stock option
exercises and $1.0 million proceeds from employee purchases under our ESPP,
partially offset by $1.9 million repayments of noninterest bearing loans.

During the six months ended June 30, 2021, cash used in operating activities of
$37.7 million was a result of $27.4 million of net loss, partially reduced by
non-cash expenses of $11.5 million (the most significant non-cash expenses were
$6.7 million of stock-based compensation and $2.9 million depreciation and
amortization) and a net negative change in working capital of $21.8 million (of
which $9.6 million was related to reductions in outstanding customer prepayments
as we fulfilled the related revenue contracts and $5.0 million related to
reductions in prepaid expenses).

During the six months ended June 30, 2021, cash used in investing activities was
$129.6 million due to a $125.1 million net investment of cash into short-term
investments and $4.5 million in property and equipment purchases. Cash provided
by financing activities of $168.9 million during the same period consisted of
$162.3 million net proceeds from our January 2021 follow-on equity offering,
$5.1 million proceeds from noninterest bearing loans, $1.4 million proceeds from
stock option exercises, and $1.2 million proceeds from employee ESPP purchases,
partially offset by $0.8 million repayments of noninterest bearing loans and
$0.3 million of equity offering costs.

Material cash needs

Our material cash requirements in the short- and long-term consist primarily of
capital expenditures, variable costs of revenue, operating expenditures,
property leases, and other. We plan to fund our material cash requirements with
our existing cash and cash equivalents and short-term investments, which
amounted to $233.5 million as of June 30, 2022, as well as anticipated cash
receipts from customers. To fund our material cash requirements in the short-
and long-term, we may also 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.

Capital expenditures. We expect to increase capital expenditures in future
periods to support our global growth initiatives. Such expenditures are expected
to consist primarily of facility renovations and improvements, laboratory
equipment, and computer equipment. We currently expect capital expenditures to
be between $45 and $50 million in 2022 and between $7 and $10 million in each of
the next two fiscal years. In connection with our new headquarters and
laboratory facility in Fremont, California, we expect to spend between $30 and
$35 million (net of expected landlord reimbursements) in combined leasehold
improvements, renovations, administrative, and other costs through the end of
2022. This is the reason for greater expected capital expenditures in 2022 as
compared to the following two years.

Variable costs of revenue. From time to time in the ordinary course of business,
we enter into agreements with vendors for the purchase of raw materials,
laboratory supplies and consumables to be used in the sequencing of customer
samples. However, we generally do not have binding and enforceable purchase
orders beyond the short term, and the timing and magnitude of purchase

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orders beyond such period is difficult to accurately project. Another primary
use of cash within variable costs of revenue relates to paying our workforce. We
currently expect spend to decrease in 2022 due to temporarily lower revenue
levels but increase in years thereafter to support revenue growth.

Operating expenditures. Our primary use of cash relates to paying employees,
spend on professional services, spend related to research and development
projects, and other costs related to our research and development, selling,
general and administrative functions. We currently expect to increase our spend
in these areas to support our business growth in 2022. On a long-term basis, we
manage future cash requirements relative to our long-term business plans.

Property leases. Our noncancelable operating lease payments were $82.7 million
as of June 30, 2022. The timing of these future payments, by year, can be found
in Part I, Item 1 of this Form 10-Q in the Notes to Consolidated Financial
Statements in Note 7, "Leases."

Other. During the second quarter of 2021, we entered into two noninterest
bearing loans to finance the purchase of $5.6 million of computer hardware,
internal use software licenses, and related ongoing support. In connection with
these loans, we made a payment of $1.86 million in 2022 and have remaining
payments of $1.86 million due in 2023, with no further payments due in 2022.
Further discussion of this transaction can be found in Part I, Item 1 of this
Form 10-Q in the Notes to Consolidated Financial Statements in Note 6, "Loans."

Significant Accounting Policies and Estimates

Our condensed consolidated financial statements are prepared in accordance with
U.S. GAAP. The preparation of these condensed consolidated financial statements
requires us to make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenue, costs and expenses, and related disclosures.
Our estimates are based on our historical experience and on various other
factors that we believe are reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.

An accounting policy is deemed to be critical if it requires an accounting
estimate to be made based on assumptions about matters that are highly uncertain
at the time the estimate is made, if different estimates reasonably could have
been used, or if changes in the estimate that are reasonably possible could
materially impact the financial statements. We believe that the assumptions and
estimates associated with revenue recognition, stock-based compensation, and
leases have the greatest potential impact on our condensed consolidated
financial statements. Therefore, we consider these to be our critical accounting
policies and estimates.

There have been no material changes in our critical accounting policies and estimates from the critical accounting policies and estimates described in our Annual Report on Form 10-K for the year ended December 31, 2021 under the heading “Critical accounting policies and estimates” in the management report on the financial position and results of operations, presented in part II, point 7.

Recent accounting pronouncements

See the sections entitled “Summary of Significant Accounting Policies – Recent Accounting Pronouncements” and “Recent Accounting Pronouncements Not Yet Adopted” in Note 2 to our unaudited condensed consolidated financial statements for more information.

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