Personalis Inc.

02/27/2025 | Press release | Distributed by Public on 02/27/2025 16:12

Annual Report for Fiscal Year Ending December 31, 2024 (Form 10-K)

Management's Discussion and Analysis ofFinancial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and accompanying notes and other financial information included elsewhere in this Annual Report on Form 10-K. 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 "Note Regarding Forward-Looking Statements" for a discussion of forward-looking statements and in Part I, Item 1A, "Risk Factors" for a discussion of factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and elsewhere in this Annual Report on Form 10-K.

Overview

We develop, market, and sell advanced cancer genomic tests and services. Our services are used by pharmaceutical companies for translational research, biomarker discovery, the development of personalized cancer therapies, and for clinical trials. Our tests are used by physicians to detect residual or recurrent cancer in patients, monitor cancer response to therapy, and uncover insights for therapy selection. We also provide whole exome and whole genome sequencing services for other diagnostic companies and population sequencing initiatives.

Today, our products are routinely used by many of the largest oncology-focused pharmaceutical companies for analysis of patient samples in their clinical trials and drug development programs. Our advanced genomic sequencing and analytics also support the development of personalized neoantigen therapies for cancer and other next-generation cancer immunotherapies. For example, we are providing genomic testing to Moderna, Inc. ("Moderna") in its ongoing clinical trials evaluating a personalized cancer therapy. In addition, we partner with diagnostics companies by providing our advanced tumor profiling and analysis capabilities as an input to their products. More recently, we launched new diagnostic offerings for the clinical setting and, in November 2023, entered into an agreement with Tempus to commercialize our NeXT Personal Dx test. We have also pursued non-cancer related business opportunities, specifically within the population sequencing market, by providing whole genome sequencing ("WGS") services under contract with the U.S. Department of Veterans Affairs Million Veteran Program ("VA MVP").

We are working with a growing number of leading cancer centers and world-class academic research institutions to build and publish the clinical evidence-base to support our products and our key indications, as well as to obtain reimbursement coverage from Medicare and other payors. Because of the ultra-high analytical sensitivity of our technology, we are primarily focusing on three indications: breast cancer, lung cancer, and immunotherapy (IO) monitoring. We have collaborations with Cancer Research UK, University College London, and the Francis Crick Institute (the TRACERx study); Institut Curie; The Royal Marsden; the Vall d'Hebron Institute of Oncology (VHIO); the University of California, San Diego; Duke University; Vanderbilt University and Johns Hopkins University (the PREDICT study); the Dana-Farber Cancer Institute; the University of Texas M.D. Anderson Cancer Center; University Medical Center Hamburg-Eppendorf (also known as UKE); and Criterium and the Academic Breast Cancer Consortium, that will focus on building the evidence-base for our technology and these indications.

Our work in oncology is underpinned by our experience and capacity for next-generation sequencing at scale. We have the capacity to sequence and analyze over 350 trillion bases of DNA per week in our facility. We believe that our capacity is already larger than most cancer genomics companies, and we continue to build automation and other infrastructure to scale further as demand increases. To date, we have sequenced approximately 500,000 human samples, of which approximately 200,000 were whole human genomes.

2024 Highlights

Total revenue of $84.6 million increased 15%, or $11.1 million, during 2024 compared to 2023, primarily driven by higher revenue from pharma tests. Revenue from pharma tests was $50.9 million in 2024 compared to $31.9 million in 2023, an increase of 60%. This increase was partially offset by lower revenue from enterprise sales, which declined $6.4 million, or 20%.

Key business accomplishments and financial updates in 2024 and early 2025 include:

Received Medicare coverage for NeXT Dx, our comprehensive tumor profiling test and we are currently seeking Medicare coverage for our separate liquid biopsy molecular residual disease ("MRD") test, Next Personal Dx.
Delivered 3,285 total molecular tests in 2024, compared with 177 tests in the prior year.
Announced a new publication validating our NeXT Personal test, an ultra-sensitive, tumor-informed circulating tumor DNA (ctDNA) assay for detecting MRD, monitoring therapy response, and detecting recurrence in patients diagnosed with solid tumor cancers.
o
The analytical validation study was published in Oncotarget on March 14, 2024.
o
The test demonstrated a detection threshold of 1.67 parts per million (PPM) of ctDNA with 100% analytical specificity; enabling an ultra-sensitive range leading to early cancer detection.
Multiple clinical data results demonstrating the clinical performance of NeXT Personal were presented at the American College of Clinical Oncology meeting in Chicago. Key presentations include:
o
Compelling early-stage breast cancer detection results presented by Dr. Isaac Garcia-Murillas and team (Institute of Cancer Research, London) and Prof. Nicolas Turner and team (Royal Marsden NHS Foundation Trust UK). In this study, they found:
NeXT Personal enabled earlier detection of recurrence, with a ~15-month lead time over imaging.
100% of patients that recurred were detected with NeXT Personal and 100% of patients that were ctDNA negative on longitudinal testing were cancer-free.
o
A presentation by Dr. Rodrigo Toledo of the Vall d'Hebron Institute of Oncology (VHIO) highlighted the importance of NeXT Personal's use for immunotherapy monitoring. This data showed:
Baseline levels and the changes in levels of ctDNA detected by NeXT Personal predict therapy response and clinical outcomes for late-stage cancer patients receiving immunotherapy.
NeXT Personal had an average lead time for detecting cancer progression of 81 days over imaging.
Highlighted clinical performance of NeXT Personal at the European Society of Medical Oncology (ESMO) Congress 2024 in Barcelona, Spain:
o
Significant results from the TRACERx study presented by Professor Charles Swanton of University College London and the Francis Crick Institute with an expanded study cohort of non-small cell lung cancer (NSCLC) patients with strong detection rates for residual cancer in the challenging landmark period (first 10 to 120 days immediately after surgery).
o
Compelling data for late-stage cancer patients on immunotherapy presented by Dr. Rodrigo Toledo of the Vall d'Hebron Institute of Oncology that accurately linked significant decreases in ctDNA levels in response to immunotherapy to longer overall survival than patients who did not respond well.
Commenced NeXT Personal Dx commercialization efforts with Tempus.
Expanded Tempus collaboration to the biopharma industry, which enables Tempus to market NeXT Personal to Tempus' pharmaceutical and biotech customers who wish to bundle MRD testing with other Tempus offerings in a given study.
Executed a cross-license agreement with Myriad Genetics, Inc. covering patent estates for tumor-informed approaches to detect MRD.
Entered into an agreement with Foresight Diagnostics Inc. to settle and dismiss pending claims of intellectual property infringement by licensing our patents. Foresight agreed to pay a low single-digit tiered royalty on sales covered by the patents.
Raised approximately $35.0 million in net financing proceeds from Tempus, consisting of $18.4 million from Tempus' exercise of all its common stock warrants, at an average price of $2.00 per share, and $16.6 million net of expenses, from Tempus' purchase of common stock at a price of $5.07 per share.
Raised an additional $30.1 million in net proceeds from selling common stock under our At-The-Market ("ATM") program at a weighted-average price of $4.61 per share.
Advanced business strategy with investment of $50.0 million from Merck and extended collaboration with Moderna.
Received a new task order in the amount of $7.5 million from the VA MVP.

Factors Affecting Our Performance

We believe there are several important factors that we expect to 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 pharmaceutical companies, enterprise customers, and oncologists to continue to seek more comprehensive molecular information to develop more efficacious cancer therapies.
The adoption of ultra-sensitive MRD testing. We are pioneering the ultra-sensitive MRD testing market with the belief that an ultra-sensitive approach will lead to earlier intervention and the ability to better trust that a negative MRD patient is likely cancer-free. There are no assurances that the market will value ultra-sensitive testing over other ways to monitor cancer and look for recurrence and disease.
Increasing adoption of our products and solutions by existing bio-pharma 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 products 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 revenue has come from existing customers. We believe that our ability to convert initial pilots into larger orders from existing customers has the potential to drive substantial long-term revenue. 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 revenue, we believe that they have the potential to grow substantially over the long term as they gain confidence in our service. Our ability to engage new customers is critical to our long-term success. 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 products. 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 products.
Obtaining coverage and reimbursement status of our diagnostic tests. Building our clinical laboratory business is subject to a number or reimbursement challenges and we may not be able to establish the medical necessity of our tests (coverage) or payment rates that cover our costs (reimbursement).
Our revenue and cost are affected by the volume of samples we receive from customers from period to period.The timing and size of sample shipments received after orders have been placed is variable. Since sample shipments can be large, and are often received from a third party, the timing of arrival can be difficult to predict over the short term. Although our long-term performance is not affected, we see quarter-to-quarter volatility due to these factors. Samples arriving later than expected may not be processed in the quarter proposed and result in revenue the following quarter. Since many of our customers request defined turnaround times, we employ project managers to coordinate and manage the complex process from sample receipt to sequencing and delivery of results.
Investment in product innovation to support growth.Investment in research and development, including the development of new products and capabilities is critical to establish and maintain our leading position. We have invested significantly in our NeXT platform, introducing new products and additional capabilities. We are also collaborating with KOLs to support the clinical utility of our products. We believe this work is critical to gaining customer adoption and expect our investments in these efforts to continue.
Leverage our operational infrastructure.We have invested significantly 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 products. We expect to grow our revenue and spread our costs over a larger volume of services.

Components of Operating Results

Revenue

We derive our revenue primarily from sales of genomic testing services to the following five customer types:

Pharma tests and servicesincludes sales of testing services and data analytics for clinical trials and research to pharmaceutical companies in support of their drug development programs.
Enterprise salesincludes sales of tumor profiling and diagnostic tests directly to another business as an input to their products. Revenue from our partnership with Natera to provide advanced tumor analysis for use in Natera's MRD test currently makes up substantially all of the revenue in this category.
Population sequencingincludes sales of genomic sequencing services and data analytics to support large-scale genetic research programs. All of the revenue in this category is from our partnership with the VA MVP.
Clinical diagnostic includes sales of comprehensive tumor profiling test that is used to help select therapy for a cancer patient and identify potential clinical trials for a patient, and sales of ultra-sensitive, tumor-informed diagnostic tests, ordered by healthcare providers for cancer patients. Revenue in this category is derived from Medicare and private insurance reimbursements.
Otherincludes sales of genomic tests and analytics to universities and non-profits.

Our ability to increase revenue will depend on our ability to further increase sales to these groups of customers and expand our customer base within each group. To do this, we are developing a growing set of state-of-the-art services and products; advancing our operational infrastructure; building our regulatory credentials; focusing our marketing efforts on large pharmaceutical companies; building and publishing the clinical evidence-base to support our products and services in our key indications, pursuing reimbursement coverage from Medicare and other payors; and seeking additional partnerships. We market to biopharma customers and doctors through a small

direct sales force. In late 2023, we entered into an agreement with Tempus to co-commercialize NeXT Personal Dx in the clinical diagnostics market and will be leveraging Tempus' significantly larger sales force as a key vector to grow our clinical diagnostic business. In late 2024, we expanded our collaboration partnership with Tempus to enable Tempus to market and sell NeXT Personal to Tempus' pharmaceutical and biotech customers who wish to bundle MRD testing with other Tempus offerings in a given study.

We have one reportable segment which is providing advanced cancer genomic tests for precision oncology and personalized testing. 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 variability in our gross margins over the medium-term due to fluctuations in customer mix and volume, investments in newer sequencing platforms and new capabilities such as automation of laboratory workflows, processing of diagnostic tests for the clinical market while we work to secure reimbursement, and costs related to our Fremont facility. Over the long-term, we anticipate higher gross margins as growing revenue leads to economies of scale.

Research and Development Expenses

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. The expenses primarily consist of personnel costs (salaries, bonuses, stock-based compensation, payroll taxes, and benefits); laboratory supplies and consumables; costs of processing samples for research, product development, collaborations and studies; 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 expect research and development expenses to remain consistent in the short-term since the completion of our reductions in workforce in 2023.

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.

Selling, general and administrative expenses have decreased since the completion of our reductions in workforce in 2023. But we expect them to increase over the medium term as we commercialize our clinical diagnostic offerings.

Lease Impairment

We recognized an impairment loss for operating lease right-of-use assets as a result of the change in use of our Menlo Park facility during the third quarter of 2023.

Restructuring and Other Charges

Restructuring and other charges consists of charges in connection with our reductions in workforce and charges in connection with the closure of our China operations.

Interest Income and Interest Expense

Interest income consists primarily of interest earned on our cash, cash equivalents and short-term investments. Interest expense is the recognition of imputed interest on noninterest bearing loans.

Other Income (Expense), Net

In connection with our November 2023 agreement with Tempus, we issued two warrants to Tempus to purchase, in the aggregate, up to 9,218,800 shares of our common stock (the "Tempus Warrants"). Other income (expense), net consists primarily of a noncash loss related to the remeasurement and settlement of the Tempus Warrants. Other income (expense), net also includes foreign currency exchange gains and losses.

Trend Financial Information

The following selected consolidated financial data should be read in conjunction with the consolidated financial statements and the notes thereto in Item 8 of Part II, "Financial Statements and Supplementary Data". Historical results are not necessarily indicative of future results.

Year Ended December 31,

2024

2023

2022

2021

2020

Consolidated Statements of Operations:

(in thousands, except share and per share data)

Revenue (1)

$

84,614

$

73,481

$

65,047

$

85,494

$

78,648

Costs and expenses

Cost of revenue

57,789

55,273

51,697

53,837

58,534

Research and development

48,905

64,776

64,912

49,312

28,568

Selling, general and administrative (2)

46,187

49,726

63,969

47,698

33,692

Lease impairment

-

5,565

-

-

-

Restructuring and other charges

-

8,077

-

-

-

Total costs and expenses

152,881

183,417

180,578

150,847

120,794

Loss from operations

(68,267

)

(109,936

)

(115,531

)

(65,353

)

(42,146

)

Interest income

5,510

5,901

2,396

367

949

Interest expense

(24

)

(110

)

(201

)

(184

)

(2

)

Other income (expense), net (3)

(18,485

)

(4,068

)

61

(42

)

(24

)

Loss before income taxes

(81,266

)

(108,213

)

(113,275

)

(65,212

)

(41,223

)

Provision for income taxes

18

83

40

14

57

Net loss

$

(81,284

)

$

(108,296

)

$

(113,315

)

$

(65,226

)

$

(41,280

)

Net loss per share, basic and diluted

$

(1.37

)

$

(2.25

)

$

(2.48

)

$

(1.49

)

$

(1.20

)

Weighted-average shares outstanding, basic and diluted

59,251,013

48,175,201

45,704,805

43,886,730

34,374,903

(1) Includes related party revenue of $2.0 million for the year ended December 31, 2024.

(2) Includes related party sales and marketing expenses of $0.5 million for the year ended December 31, 2024.

(3) Includes related party other expense of $18.3 million in connection with the change in fair value of Tempus Warrants for the year ended December 31, 2024.

December 31,

2024

2023

2022

2021

2020

(in thousands)

Cash and cash equivalents, and short-term investments

$

185,009

$

114,179

$

167,658

$

287,064

$

203,290

Working capital

171,889

99,510

166,568

286,918

180,083

Total assets

270,268

225,099

292,700

396,528

244,842

Total debt

1,772

2,880

2,596

3,494

-

Long-term obligations

36,185

48,424

41,430

54,914

9,261

Total liabilities

67,311

95,658

74,561

86,227

49,897

Total stockholders' equity

202,957

129,441

218,139

310,301

194,945

Results of Operations

This section discusses 2024 and 2023 items and year-to-year comparisons between 2024 and 2023.

Revenue

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

Year Ended December 31,

2024

2023

Change

Pharma tests and services (1)

$

50,939

$

31,904

$

19,035

60%

Enterprise sales

25,364

31,729

(6,365

)

(20%)

Population sequencing

7,430

9,412

(1,982

)

(21%)

Clinical diagnostic

759

38

721

1897%

Other

122

398

(276

)

(69%)

Total revenue

$

84,614

$

73,481

$

11,133

15%

(1) Includes related party revenue of $2.0 million for the year ended December 31, 2024.

The following table shows customers that made up at least 10% of total revenue in each year presented:

Year Ended December 31,

2024

2023

Natera, Inc.

30%

43%

VA MVP

*

13%

Moderna, Inc.

28%

*

* Less than 10% of revenue

Pharma tests and services

The primary driver for the increase in pharma tests and services revenue in 2024 was due to increases in revenue from one of our personalized cancer therapy customers that ramped up clinical trial patient enrollments. Revenue from this customer increased $20.0 million in 2024 compared with the prior year. Revenue from this customer is expected to decline over the next few quarters until this customer is ready to commercialize its personalized cancer therapy program, or until other projects increase in size.

Enterprise sales

Revenue from enterprise sales decreased in 2024 due to lower average selling prices. The number of samples we processed for Natera increased by over 7%, but such increase was offset by lower selling prices.

We launched a reduced-cost version of our exome product offering for Natera near the end of the first quarter of 2024 to support their requirement for an overall reduction in price. Our agreement with Natera included minimum volume commitments through the end of 2024. We amended our agreement with Natera during the fourth quarter of 2024 to extend minimum volume commitments through the second quarter of 2025.

Population sequencing

Revenue recognized each period from population sequencing is impacted by timing of our fulfillment of samples under each annual task order. The decrease in revenue in 2024 was due to a decrease in the number of samples we processed in addition to a small decline in selling prices. Our annual task orders received in 2024 and 2023 were $7.5 million and $7.5 million, respectively. Our contract with the VA MVP does not include specific testing turnaround times. Therefore, we may modulate the volume of samples processed from the VA MVP to accommodate sample volumes from other customers, which can vary from period to period. We anticipate fulfilling the new task order received in September 2024 during the first three quarters of 2025.

Clinical diagnostic

Clinical diagnostic revenue is generated from Medicare and private insurance payors, In January 2024, we received a Medicare coverage determination for NeXT Dx, our ultra-comprehensive tumor genomic profiling assay. The revenue of $0.8 million in 2024 was mainly due to an increase in NeXT Dx tests reimbursed by Medicare. We delivered a total of 3,285 molecular cancer tests in 2024.

Costs and Expenses

The following table shows costs and expenses (in thousands, except percentages):

Year Ended December 31,

2024

2023

Change

Cost of revenue

$

57,789

$

55,273

$

2,516

5%

Research and development

48,905

64,776

(15,871

)

(25%)

Selling, general and administrative

46,187

49,726

(3,539

)

(7%)

Lease impairment

-

5,565

(5,565

)

*

Restructuring and other charges

-

8,077

(8,077

)

*

Total costs and expenses

$

152,881

$

183,417

$

(30,536

)

(17%)

* Not meaningful

Cost of revenue

The increase in cost of revenue in 2024 was primarily due to higher revenue levels (revenue increased 15% over the same period). Cost of revenue increased at a lesser rate as compared to the corresponding revenue increases primarily because of lower labor costs resulting from prior workforce reductions and operational efficiencies. Specific components of the increase were a $4.0 million increase in direct material costs due to support higher revenue levels, a $2.1 million increase in allocated facilities and equipment costs (mainly due to moving our laboratory from our Menlo Park facility to our Fremont facility in the third quarter of 2023), partially offset by a

$2.8 million decrease in labor costs and a $0.7 million decrease in shared laboratory costs due to greater usage of our laboratory capacity for R&D projects.

Research and development

The decrease in research and development expenses in 2024 was primarily due to cost savings from our workforce reductions in 2023 and lower sample processing costs for product development, collaborations, and clinical evidence generation.

Specific components of the decrease include a $6.3 million decrease in personnel-related costs driven by our workforce reductions, a $4.7 million decrease in allocated facilities costs (primarily due to a reduction in R&D usage of our facilities relative to other functions, as well as lower facilities costs in general), and a $4.9 million decrease in sample processing costs incurred in our laboratory for product development, collaborations, and clinical evidence generation.

Selling, general and administrative

The decrease in selling, general and administrative expenses was primarily due to lower professional outside services expenses and cost savings from our workforce reductions in 2023.

Specific components of the decrease were a $3.1 million decrease in professional outside services, a $2.9 million decrease in personnel-related costs driven by our workforce reductions, and a $0.5 million decrease in office equipment costs; partially offset by a $1.4 million increase in allocated facilities costs, $1.0 million increase in other outside services and office expenses and a $0.6 million increase in other marketing costs, including trade shows expenses.

Lease impairment

During the third quarter of 2023, we completed the move of our laboratory operations from our Menlo Park facility to our Fremont facility and began actively marketing the Menlo Park space for sublease. Accordingly, we evaluated the ongoing value of the operating lease right-of-use asset associated with the Menlo Park facility. Based on this evaluation, we determined that the right-of-use asset with a carrying amount of $6.7 million was no longer recoverable and was impaired and wrote it down to its estimated fair value of $1.1 million, which resulted in a noncash impairment loss of $5.6 million. Estimated fair value was based on expected future sublease cash flows (with the assistance of a third-party real estate broker), net of brokerage commissions and estimated tenant incentives, discounted at a market rate of return on similar assets. The estimation of fair value also included expected downtime prior to the commencement of a future sublease.

Restructuring and other charges

We reduced our workforce during the first quarter of 2023 and the fourth quarter of 2023 to reduce our cash burn and increase operating efficiencies, which combined affected about 100 employees. We also closed our China operations. The $8.1 million in restructuring and other charges recognized in 2023 is comprised of $7.5 million in one-time employee termination benefits (including costs related to termination of our former China employees) and $0.6 million of other noncash charges (primarily asset disposals and impairments in connection with the closure of our China operations).

Interest Income, Interest Expense and Other Income (Expense), Net

The following table shows interest income and expense, and other income (expense), net (in thousands, except percentages):

Year Ended December 31,

2024

2023

Change

Interest income

$

5,510

$

5,901

$

(391

)

(7%)

Interest expense

(24

)

(110

)

86

(78%)

Other income (expense), net

(18,485

)

(4,068

)

(14,417

)

354%

Total

$

(12,999

)

$

1,723

$

(14,722

)

(854%)

Interest income and interest expense

The decrease in interest income was due to lower average investment balances in 2024, partially offset by increased yields on our investments. Interest expense is the recognition of imputed interest on noninterest bearing loans.

Other income (expense), net

In connection with our November 2023 agreement with Tempus, we issued two warrants to purchase, in the aggregate, up to 9,218,800 shares of our common stock ("Tempus Warrants") at an average exercise price of $2.00 per share. If Tempus acquired any shares of common stock directly from us other than by exercising the warrants, then the total number of shares issuable upon exercise of the warrants would have been reduced by such shares. Because the number of shares issuable upon settlement were subject to adjustment, the warrants were classified as liability instruments while outstanding and were subject to remeasurement at each balance

sheet date, with changes in fair value recognized as other income (expense), net. In August 2024, Tempus exercised in full the Tempus Warrants for $18.4 million in cash; as such there will be no further noncash gains or losses associated with the Tempus Warrants going forward.

Prior to the exercise, we recognized noncash losses of $18.3 million as a result of increases in the fair value of the Tempus Warrants in other income (expense), net in the consolidated statements of operations during the year ended December 31, 2024.

The initial fair value at the time of issuance of the warrants of $6.9 million exceeded the total proceeds received from Tempus of $6.0 million, which resulted in a loss of $0.9 million. In addition, we recognized noncash losses of $3.1 million as a result of increases in the fair value of the Tempus Warrants after the issuance date in 2023. The increase in fair value, plus the immediate loss of $0.9 million, resulted in a $4.0 million expense, which was recognized in other income (expense), net in the consolidated statements of operations during the year ended December 31, 2023.

Separately, upon dissolution of our China entity (Personalis (Shanghai) Ltd) during the first quarter of 2024, we reclassified an accumulated foreign currency translation loss of $0.2 million to other income (expense), net.

Liquidity and Capital Resources

The following table presents selected financial information (in thousands):

December 31,

2024

2023

Cash and cash equivalents, and short-term investments

$

185,009

$

114,179

Property and equipment, net

48,274

57,366

Contract liabilities

3,100

7,216

Working capital

171,889

99,510

From our inception through December 31, 2024, we have funded our operations primarily from net proceeds from issuance of redeemable convertible preferred stock, IPO, follow-on equity offerings, At-the-Market ("ATM") facility (see Note 2, Summary of Significant Accounting Policies for additional information), Tempus exercising warrants and purchasing additional shares under an investment agreement, and Merck purchasing shares under an investment agreement (see Note 8, "Related Party Transactions" in our consolidated financial statements for additional information), as well as debt financings. As of December 31, 2024, we had cash and cash equivalents of $91.4 million and short-term investments of $93.6 million.

We have incurred net losses since our inception. We anticipate that our current cash and cash equivalents and short-term investments 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 insufficient to satisfy our liquidity requirements, including because of lower demand for our services or other risks described in this Annual Report on Form 10-K, 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 sales agreement prospectus supplement in December 2024, pursuant to which we may offer and sell up to $50.0 million of shares of our common stock through our ATM facility. The sale of equity and convertible debt securities may result in dilution to our stockholders and, in the case of 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 investments portfolio is primarily invested in highly rated securities, with the primary objective of minimizing the potential risk of principal loss. Our investment policy generally requires securities to be investment grade and limits the amount of credit exposure to any one issuer.

Cash Flows

Year Ended December 31,

2024

2023

Change

Net cash used in operating activities

$

(45,150

)

$

(56,258

)

$

11,108

(20%)

Net cash provided by (used in) investing activities

(35,069

)

13,099

(48,168

)

(368%)

Net cash provided by financing activities

114,672

11,031

103,641

940%

The $11.1 million decrease in cash used in operating activities in 2024 was primarily due to lower operating expenses, particularly lower payroll expenses as a result of our workforce reductions in 2023 and higher gross margin, due to a combination of higher revenue levels and higher gross margin percentage. These increases in operating cash flow were partially offset by changes in working capital. Notably, during the first half of 2023 we received significant customer deposits in connection with our agreement with Moderna to support its ongoing clinical trials project for development of a personalized cancer therapy and the customer deposit did not repeat in 2024. We also paid more in rent in 2024 as compared to 2023 for our Fremont headquarters due to the end of a free rent period plus escalating rent payments. Furthermore, we paid more to vendors in 2024 as compared to 2023 due to timing of vendor shipments and billings.

The $48.2 million decrease in cash provided by investing activities in 2024 was due to increase in investments of our cash into short-term investments by $17.8 million and reduction in maturities of our short-term investments by $40.0 million, partially offset by a $9.3 million reduction in capital expenditures.

The $103.6 million increase in cash provided by financing activities was driven by $50 million from Merck purchasing shares under an investment agreement, $36.2 million from Tempus exercising warrants and purchasing additional shares under an investment agreement, $26.6 million higher net proceeds from sales of common stock under our ATM facility, and $2.1 million lower repayments of loans; partially offset by $1.2 million payments of costs associated with the Tempus and Merck investments, and $0.6 million lower proceeds from our employee incentive plans. In addition, we received $6.0 million in proceeds from the issuance of Tempus Warrants and $3.4 million from loans in 2023, which did not occur in 2024.

Material Cash Requirements

Our material cash requirements in the short- and long-term consist primarily of variable costs of revenue, operating expenditures, capital 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 $185.0 million as of December 31, 2024, as well as anticipated cash receipts from customers. To fund our material cash requirements in the short-term 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.

Variable costs of revenue. From time to time in the ordinary course of business, we enter into agreements with vendors for the purchase of raw materials, laboratory supplies and consumables to be used in the sequencing of customer samples. However, we generally do not have binding and enforceable purchase orders beyond the short term, and the timing and magnitude of purchase orders beyond such period is difficult to accurately project. We currently expect spending in this area to remain similar to the levels in 2024 to support expected higher levels of revenue.

Operating expenditures. Our primary use of cash relates to employee compensation, 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 our spending in these areas to remain similar to the levels in 2024. On a long-term basis, we manage future cash requirements relative to our long-term business plans.

Capital expenditures. Capital expenditures are expected to increase from 2024 levels as we expect to expand NeXT Personal Dx capacity. Going forward, our capital expenditures are expected to consist primarily of laboratory equipment and computer equipment. We currently expect capital expenditures to be approximately $8.0 million in 2025 and between $7 million to $10 million in each of the years 2026 and 2027.

Property leases. Our noncancelable operating lease payments were $70.5 million as of December 31, 2024. The timing of these future payments, by year, can be found in Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial Statements in Note 7, "Leases."

Other. As of December 31, 2024, we have an outstanding noninterest bearing loan that was used to finance the purchase of equipment for our laboratory. We owe a total of $1.8 million, of which the majority is payable in 2025. Further discussion of this loan can be found in Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial Statements in Note 6, "Loans."

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with U.S. GAAP. The preparation of our 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, leases, and common stock warrants have the greatest potential impact on our consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates.

Revenue Recognition

We generate our revenue from the sale of genomic testing 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.

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 the significant majority of our contracts to date, the customer orders a specified quantity of sequencing and the delivery of each test to the customer is accounted for as one performance obligation.

Fees for our genomic testing 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 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 generally do not represent a material right provided to a customer since they are not deemed to be incremental to the pricing offered to the customer or are not enforceable options to acquire additional goods. As a result, these discounts do not constitute a material right and do not meet the definition of a separate performance obligation, except in limited instances. We do not offer retrospective discounts or rebates.

Leases

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

In August 2021, we entered into a 13.5-year lease for our corporate headquarters in Fremont, California. We estimated our incremental borrowing rate as the rate implicit in the lease was not readily determinable. To determine the incremental borrowing rate, we estimated our credit rating by comparing certain financial ratios and metrics of the Company to those of other issuers with publicly-available credit ratings from Standard & Poor's (S&P). We then adjusted yields from publicly traded corporate bonds of companies of similar size and credit rating over a term approximating the term of our lease for the nature of the collateral. In September 2022, the lease commencement date for our facility in Fremont, California was delayed from the original intended date due to delays in the completion of the work necessary for us to move into the facility, which resulted in a reassessment of the lease term. Our concluded incremental borrowing rate for this remeasured lease was 10.5%, which resulted in a lease liability and right-of-use asset of $31.8 million.

During the third quarter of 2023, we completed the move of our laboratory operations from our Menlo Park facility to our Fremont facility and began actively marketing the Menlo Park space for sublease. Accordingly, we evaluated the ongoing value of the operating lease right-of-use asset associated with the Menlo Park facility. Based on this evaluation, we determined that the right-of-use asset with a carrying amount of $6.7 million was no longer recoverable and was impaired and wrote it down to its estimated fair value of $1.1 million, which resulted in a noncash impairment loss of $5.6 million. Estimated fair value was based on expected future sublease cash flows (with the assistance of a third-party real estate broker), net of brokerage commissions and estimated tenant incentives, discounted at a market rate of return on similar assets. The estimation of fair value also included expected downtime prior to the commencement of a future sublease.

Common Stock Warrants

In November 2023, we entered into an agreement with Tempus to commercialize NeXT Personal Dx in the clinical diagnostics market. In connection with this agreement, we issued to Tempus two warrants to purchase, in the aggregate, up to 9,218,800 shares of our common stock. In August 2024, Tempus exercised the warrants in full to purchase 9,218,800 shares of Personalis common stock for $18.4 million in cash, at an average exercise price of $2.00 per share.

The Tempus Warrants included a provision under which the total number of shares issuable upon settlement were subject to adjustment. Consequently, prior to the exercise, the Tempus Warrants were classified as liability instruments while outstanding and subject to remeasurement at each balance sheet date, with changes in fair value recognized as other income (expense), net in the consolidated statements of operations. Fair values of the warrants were estimated using the Black-Scholes option-pricing model. Estimating fair value using the Black-Scholes option-pricing model requires a number of assumptions. Changes in the assumptions can materially affect the fair value and ultimately how much other income (or expense) is recognized. The inputs generally require analysis to develop.

Expected Term-The expected term assumption represents the contractual period of each of the two warrants.
Expected Volatility-Expected volatility was based on the Company's actual historical volatility over the expected terms of the warrants.
Expected Dividend Yield-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 our 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 warrants.

Recent Accounting Pronouncements

See the sections titled "Summary of Significant Accounting Policies-Recent Accounting Pronouncements" in Note 2 to our consolidated financial statements for additional information.