ADAPTIVE BIOTECHNOLOGIES CORP Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-K)

You should read the following discussion and analysis of our financial condition
and results of operations together with our consolidated financial statements
and related notes and the other financial information appearing elsewhere in
this Annual Report on Form 10-K, as well as the other financial information we
file with the SEC from time to time. Some of the information contained in this
discussion and analysis or set forth elsewhere in this report, including
information with respect to our plans and strategy for our business and related
financing, includes forward-looking statements that involve risks and
uncertainties relating to our future plans, objectives, expectations, intentions
and financial performance and the assumptions that underlie these statements. As
a result of many factors, including those factors set forth in the "Risk
Factors" section of this Annual Report on Form 10-K, our actual results could
differ materially from the results described in or implied by the
forward-looking statements contained in the following discussion and analysis.

This section generally discusses 2021 and 2020 items and year-to-year
comparisons between 2021 and 2020. Discussions of 2019 items and year-to-year
comparisons between 2020 and 2019 may be found in Part II, Item 7 under the
caption "Management's Discussion and Analysis of Financial Condition and Results
of Operations" in our Annual Report on Form 10-K for the year ended December 31,
2020 filed with the SEC on February 24, 2021.

Overview

We are advancing the field of immune medicine by harnessing the inherent biology
of the adaptive immune system to transform the diagnosis and treatment of
disease. We believe the adaptive immune system is nature's most finely tuned
diagnostic and therapeutic for most diseases, but the inability to decode it has
prevented the medical community from fully leveraging its capabilities. Our
immune medicine platform applies our proprietary technologies to read the
diverse genetic code of a patient's immune system and aims to understand
precisely how the immune system detects and treats disease in that patient. We
capture these insights in our dynamic clinical immunomics database, which is
underpinned by computational biology and machine learning, and use them to
develop and commercialize clinical products and services that we are tailoring
to each individual patient. We have commercial products and services and a
robust pipeline of clinical products and services that we are designing to
diagnose, monitor and enable the treatment of diseases, such as cancer,
autoimmune disorders and infectious diseases.

Our immune medicine platform is the foundation for our expanding suite of
products and services. The cornerstone of our platform and core immunosequencing
product, immunoSEQ, serves as our underlying research and development engine and
generates revenue from biopharmaceutical and academic customers. Our first
clinical diagnostic product, clonoSEQ, is the first test authorized by the FDA
for the detection and monitoring of MRD in patients with MM, ALL and CLL and is
also available as a CLIA-validated LDT for patients with other lymphoid cancers.
Leveraging our collaboration with Microsoft, we are creating the TCR-Antigen
Map. We are using this map to develop research solutions by disease called
immunoSEQ T-MAP and a diagnostic product for many diseases from a single blood
test called T-Detect.

T-Detect COVID, for which we have received EUA, is designed to confirm past
SARS-CoV-2 infection, the virus that causes COVID-19, and is also the first
indication for the T-Detect product line. We expect to launch a second
indication, T-Detect Lyme, during the 2022 Lyme season. In addition, we have
confirmed signals in Crohn's disease, celiac disease, and multiple sclerosis, as
well as identified new signals in ulcerative colitis and rheumatoid arthritis.

Our therapeutic product candidates, being developed under the Genentech
Agreement, leverage our platform to identify specific receptors on immune cells
to develop into cellular therapies in oncology. We also extended our platform to
identify highly potent neutralizing antibodies against SARS-CoV-2 and we believe
this differentiated approach may be leveraged across multiple disease states.

For our life sciences research customers, we provide two categories of products
and services using immunoSEQ. First, we provide immunosequencing services, the
revenue from which we record as sequencing revenue. Second, we provide certain
research customers professional support, for which we receive nonrefundable
upfront or recurring payments. We may receive additional payments upon those
customers achieving specified milestones. Revenue related to these activities
are recorded as development revenue.

For our clinical diagnostics customers, we sell our clonoSEQ diagnostic test and
T-Detect COVID test, which include our immunosequencing services and are thus
recorded as sequencing revenue. In the future, we intend to sell other
diagnostic products and services, including other indications for T-Detect,
which we also expect to record as sequencing revenue.

For our current drug discovery collaborator, Genentech, we screen, identify and
characterize TCRs in support of our collaboration. We record revenue from this
collaboration as development revenue.

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Historically, we have sold immunoSEQ as a fee-for-service offering. These
research offerings have comprised the majority of our revenue to date, although
our business is pursuing broader opportunities. As we continue to expand the use
of our clonoSEQ diagnostic tests, develop and commercialize T-Detect and develop
and commercialize therapeutic product candidates with our drug discovery
collaborator, we expect our mix of revenue to shift to clinical products and
services, which we believe will become our largest sources of revenue.

We are actively pursuing opportunities to deepen our relationships with current
customers and initiate relationships with new customers. We have an experienced,
specialty salesforce that is targeting department heads, laboratory directors,
principal investigators, core facility directors, clinicians, payors, research
scientists and pathologists at leading academic institutions, biopharmaceutical
companies, research institutions and contract research organizations. As MRD
assessment becomes standard practice for patient management across a range of
blood cancers, we believe it will be essential for clinicians and patients to
have access to a highly accurate, sensitive and standardized MRD assessment
tool. We are focused on establishing and maintaining collaborative relationships
with payors, developing health economic evidence and building billing and
patient access infrastructure to expand reimbursement coverage for our clinical
diagnostics. We continue to seek expanded coverage of our clonoSEQ diagnostic
test and have successfully expanded coverage through contractual agreements or
positive medical policies with Medicare and several of the largest national
private health insurers in the United States.

We recognized revenue of $154.3 million and $98.4 million for the year ended
December 31, 2021 and 2020, respectively. Net loss attributable to Adaptive
Biotechnologies Corporation was $207.3 million and $146.2 million for the year
ended December 31, 2021 and 2020, respectively. We have funded our operations to
date principally from the sale of convertible preferred stock and common stock
and, to a lesser extent, sequencing and development revenue. As of December 31,
2021 and 2020, we had cash, cash equivalents and marketable securities of $570.2
million and $806.8 million, respectively.

Follow-up offer

In July 2020, we completed an underwritten public offering of our common stock
in which we issued and sold 7,200,000 shares of common stock at a public
offering price of $40.00 per share. We received $271.8 million in net proceeds,
after deducting underwriting discounts and net offering expenses paid by us.

Components of operating results

Income

We derive our revenue from two sources: (1) sequencing revenue and (2) development revenue.

Sequencing revenue. Sequencing revenue reflects the amounts generated from
providing testing services through clonoSEQ to clinical and research customers,
from providing our T-Detect COVID test to clinical customers and from providing
sequencing services through immunoSEQ to research customers.

For our clinical customers, we primarily derive revenue from providing our
clonoSEQ report to ordering physicians. We bill medical institutions and
commercial and government payors based on tests delivered to ordering
physicians. Amounts paid for clonoSEQ diagnostic tests by medical institutions
and commercial and government payors vary based on respective reimbursement
rates and patient responsibilities, which may differ from our targeted list
price. We recognize clinical revenue by evaluating customer payment history,
contracted reimbursement rates, if applicable, and other adjustments to estimate
the amount of revenue that is collectible.

For our clonoSEQ coverage under Medicare, we bill an episode of treatment when
we deliver the first eligible test results. This billing contemplates all
necessary tests required during a patient's treatment cycle, which is currently
estimated at approximately four tests per patient, including the initial
sequence identification test. Revenue recognition commences at the time the
initial billable test result is delivered and is based upon cumulative tests
delivered to date. Any unrecognized revenue from the initial billable test is
recorded as deferred revenue and recognized either as we deliver our estimate of
the remaining tests in a patient's treatment cycle or when the likelihood
becomes remote that a patient will receive additional testing.

For our research customers, which include biopharmaceutical customers and
academic institutions, delivery of the sequencing results may include some level
of professional support and analysis. Terms with biopharmaceutical customers
generally include non-refundable upfront payments, which we record as deferred
revenue. For all research customers, we recognize revenue as we deliver
sequencing results. From time to time, we offer discounts in order to gain
rights and access to certain datasets. Revenue is recognized net of these
discounts and costs associated with these services are reflected in cost of
revenue. In periods where our sample estimates are reduced or a customer project
is cancelled and, in either case, we have remaining related deferred revenue, we
recognize revenue using a cumulative catch-up approach based on the proportion
of samples delivered to date relative to the remaining samples expected to be
delivered.

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Development revenue. Development revenue primarily represents regulatory or
development support services that we provide to biopharmaceutical customers who
seek access to our platform to support their therapeutic development activities.
We enter into collaboration and similar agreements with these customers. These
agreements may include substantial non-refundable upfront payments, which we
recognize as development revenue over time as we perform the respective
services. When the agreements include sequencing activities, we separately
classify those activities as sequencing revenue. Additionally, we generate
development revenue from the achievement of regulatory milestones.

During the year ended December 31, 2021, we executed an intellectual property
license agreement that includes variable consideration related to sales-based
royalties. Any consideration related to such royalties will be recognized as
development revenue at the later of when (i) the related sales occur or (ii) the
performance obligation to which some or all of the sales-based royalty has been
allocated has been satisfied (or partially satisfied).

We expect revenue to increase over the long term, particularly as the mix of
revenue migrates to clinical diagnostics and drug discovery. The pace by which
this mix migrates will be determined by the level of customer adoption and
frequency of use of our products and services. Our revenue may fluctuate from
period to period due to the uncertain nature of delivery of our products and
services, the achievement of milestones by us or our customers, timing of
expenses incurred, changes in estimates of total anticipated costs related to
our Genentech Agreement and other events not within our control, such as the
delivery of customer samples or customer decisions to no longer pursue their
development initiatives.

Due to the continued uncertainties associated with the COVID-19 pandemic, we may experience variability in our revenues in the near term as our customers’ abilities to source samples for their research initiatives change as the initiatives of the customers evolve and that clinical trials are affected by the pandemic. .

Revenue cost

Cost of revenue includes the cost of materials, personnel-related expenses
(including salaries, benefits and share-based compensation), shipping and
handling expenses, equipment costs and allocated facility costs associated with
processing samples and professional support for our sequencing revenue
activities. Allocated facility costs include depreciation of laboratory
equipment, as well as allocated facility occupancy and information technology
costs. Costs associated with processing samples are recorded as expense,
regardless of the timing of revenue recognition. As such, cost of revenue and
related volume does not always trend in the same direction as revenue
recognition and related volume. Additionally, costs to support our Genentech
Agreement are a component of our research and development expenses.

We expect cost of revenue to increase in absolute dollars as we grow our
sequencing volume and make increased investments in laboratory automation and
facilities, but the cost per sample to decrease over the long term due to the
efficiencies we may gain as sequencing volume increases from improved
utilization of our laboratory capacity, automation and other value engineering
initiatives. If our sample volume throughput is reduced as a result of the
COVID-19 pandemic or otherwise, cost of revenue as a percentage of total revenue
may be adversely impacted due to fixed overhead costs.

Research and development costs

Research and development expenses consist of laboratory materials costs,
personnel-related expenses, equipment costs, allocated facility costs,
information technology expenses and contract service expenses. Research and
development activities support further development and refinement of existing
assays and products, discovery of new technologies and investments in our immune
medicine platform. We also include in research and development expenses the
costs associated with software development of applications to support future
commercial opportunities, as well as development activities to support
laboratory scaling and workflow. We are currently conducting research and
development activities for several products and services and we typically use
our laboratory materials, personnel, facilities, information technology and
other development resources across multiple development programs. Additionally,
certain of these research and development activities benefit more than one of
our product opportunities. We do not track research and development expenses by
specific product candidates.

A component of our research and development expenses are costs supporting
clinical and analytical validations to obtain regulatory approval for future
clinical products and services. Additionally, the costs to support our Genentech
Agreement are a component of our research and development expenses. Some of
these activities have generated and may in the future generate development
revenue.

We expect our research and development expenses to continue to increase in
absolute dollars as we innovate and expand the application of our platform.
However, we expect research and development expenses to decrease as a percentage
of revenue in the long term, although the percentage may fluctuate from period
to period due to the timing and extent of our development and commercialization
efforts.

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Sales and marketing expenses

Sales and marketing expenses consist primarily of personnel-related expenses for
commercial sales, product and account management, marketing, reimbursement,
medical education and business development personnel that support
commercialization of our platform products. In addition, these expenses include
external costs, such as advertising expenses, customer education and promotional
expenses, market analysis expenses, conference fees, travel expenses and
allocated facility costs.

We expect our sales and marketing expenses to increase in absolute dollars as we
expand our commercial sales, marketing and business development teams and
increase marketing activities to drive awareness and adoption of our products
and services. However, we expect sales and marketing expenses to decrease as a
percentage of revenue in the long term, subject to fluctuations from period to
period due to the timing and magnitude of these expenses.

General and administrative expenses

General and administrative expenses consist primarily of personnel-related
expenses (including salaries, benefits and share-based compensation) for our
personnel in executive, legal, finance and accounting, human resources and other
administrative functions, including third-party billing services. In addition,
these expenses include insurance costs, external legal costs, accounting and tax
service expenses, consulting fees and allocated facility costs.

We expect our general and administrative expenses to continue to increase in absolute dollars as we increase our workforce. Although we expect to increase in absolute dollars, we expect these expenses to decline as a percentage of revenue over the long term as revenue increases.

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Income statement data and other financial and operating data

The following table sets forth our statements of operating data and other financial and operating data for the periods presented:


                                                                  Year Ended December 31,
                                                       2021                    2020                2019
                                                   (in thousands, except share and per share amounts)
Statements of Operations Data:
Revenue
Sequencing revenue                               $          78,896       $          41,439     $     43,519
Development revenue                                         75,448                  56,943           41,552
Total revenue                                              154,344                  98,382           85,071
Operating expenses
Cost of revenue                                             49,301                  22,530           22,274
Research and development                                   142,343                 116,072           70,705
Sales and marketing                                         95,465                  61,358           38,453
General and administrative                                  74,502                  49,536           30,332
Amortization of intangible assets                            1,699                   1,703            1,698
Total operating expenses                                   363,310                 251,199          163,462
Loss from operations                                      (208,966 )              (152,817 )        (78,391 )
Interest and other income, net                               1,668                   6,590            9,785
Net loss                                                  (207,298 )              (146,227 )        (68,606 )
Add: Net loss attributable to noncontrolling
interest                                                        19                       -                -
Net loss attributable to Adaptive
Biotechnologies Corporation                               (207,279 )              (146,227 )        (68,606 )
Fair value adjustment to Series E-1
convertible preferred stock options                              -                       -             (964 )
Net loss attributable to Adaptive
Biotechnologies Corporation common
shareholders                                     $        (207,279 )     $        (146,227 )   $    (69,570 )
Net loss per share attributable to Adaptive
Biotechnologies Corporation common
shareholders, basic and diluted                  $           (1.48 )     $           (1.11 )   $      (1.01 )
Weighted-average shares used in computing net
loss per share attributable to Adaptive
Biotechnologies Corporation common
shareholders, basic and diluted                        140,354,915             131,216,468       69,165,315
Other Financial and Operating Data:
Adjusted EBITDA(1)                               $        (151,743 )     $        (119,584 )   $    (57,476 )




(1) Adjusted EBITDA is a non-GAAP financial measure that we define as net loss
attributable to Adaptive Biotechnologies Corporation adjusted for interest and
other income, net, income tax (expense) benefit, depreciation and amortization
and share-based compensation expenses. Please refer to "Adjusted EBITDA" below
for a reconciliation between Adjusted EBITDA and net loss attributable to
Adaptive Biotechnologies Corporation, the most directly comparable GAAP
financial measure, and a discussion about the limitations of Adjusted EBITDA.

Comparison of the years ended December 31, 2021 and 2020

Revenue



                                        Year Ended December 31,              Change               Percent of Revenue
(in thousands, except percentages)        2021              2020          $           %          2021            2020
Revenue
Sequencing revenue                    $      78,896       $ 41,439     $ 37,457         90 %          51 %            42 %
Development revenue                          75,448         56,943       18,505         32            49              58
Total revenue                         $     154,344       $ 98,382     $ 55,962         57           100 %           100 %


The $37.5 million increase in sequencing revenue was primarily attributable to a
$24.3 million increase in revenue generated from biopharmaceutical and academic
customers, inclusive of a $2.9 million increase due to changes in estimates of
total samples to be provided under certain of our MRD development agreements.
Additionally, there was a $13.2 million increase in revenue generated from
clinical customers, inclusive of a $1.9 million increase related to Medicare
reimbursements resulting from our determination that the likelihood of
additional testing for specific patients was remote and a change in our estimate
of expected cumulative tests per patient for one of our covered indications.

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Research sequencing volume increased by 42% to 32,146 sequences delivered in the
year ended December 31, 2021 from 22,663 sequences delivered in the year ended
December 31, 2020. Clinical sequencing volume, excluding T-Detect COVID volume,
increased by 48% to 22,516 clinical tests delivered in the year ended December
31, 2021 from 15,186 clinical tests delivered in the year ended December 31,
2020.

The $18.5 million increase in development revenue was primarily attributable to
a $9.2 million increase in revenue generated from the Genentech Agreement and an
$8.4 million increase in revenue recognized from MRD development agreements,
inclusive of a $7.5 million increase in revenue recognized upon the achievement
of certain regulatory milestones by us and our customers' therapeutics.

Cost of Revenue



                                         Year Ended December 31,              Change                Percent of Revenue
(in thousands, except percentages)         2021             2020           $           %          2021              2020
Cost of revenue                        $     49,301       $  22,530     $ 26,771        119 %          32 %             23 %


The $26.8 million increase in cost of revenue was primarily attributable to a
$13.5 million increase in labor, overhead and facility costs and a $9.7 million
increase in materials costs resulting from increased revenue sample volume.
Additionally, there was a $1.6 million increase in sample collection costs and a
$1.5 million increase in shipping costs. These increases were partially offset
by a $0.9 million decrease related to higher usage of our production laboratory
to process research and development samples versus revenue samples.

Research and Development



                                         Year Ended December 31,              Change              Percent of Revenue
(in thousands, except percentages)         2021             2020           $           %         2021           2020
Research and development               $    142,343       $ 116,072     $ 26,271         23 %        92 %           118 %



The following table presents research and development expenses disaggregated by cost classification for the periods presented:


                                                      Year Ended December 31,
(in thousands)                                          2021             2020         Change
Research and development materials and allocated
production laboratory expenses                      $     51,625       $  50,561     $   1,064
Personnel expenses                                        62,874          44,969        17,905
Allocable facilities and information technology            6,363           5,277         1,086
expenses
Software and cloud services expenses                       3,344           3,521          (177 )
Depreciation and other expenses                           18,137          11,744         6,393
Total                                               $    142,343       $ 116,072     $  26,271


The $26.3 million increase in research and development expenses was primarily
attributable to a $17.9 million increase in personnel costs and a $6.4 million
increase in depreciation and other expenses, which included a $2.3 million
increase in consultant costs.

Sales and Marketing



                                         Year Ended December 31,              Change                Percent of Revenue
(in thousands, except percentages)         2021             2020           $           %          2021              2020
Sales and marketing                    $     95,465       $  61,358     $ 34,107         56 %          62 %             62 %


The $34.1 million increase in sales and marketing expenses was primarily
attributable to $23.7 million in additional personnel costs, $6.0 million in
additional marketing expenses, a $2.2 million increase in travel and customer
event related expenses and a $1.2 million increase in consultant costs. Our
clonoSEQ and T-Detect marketing efforts were the largest drivers of the $6.0
million increase in marketing expenses.



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General and Administrative



                                         Year Ended December 31,              Change                Percent of Revenue
(in thousands, except percentages)         2021             2020           $           %          2021              2020
General and administrative             $     74,502       $  49,536     $ 24,966         50 %          48 %             50 %


The $25.0 million increase in general and administrative expenses was primarily
attributable to a $13.3 million increase in personnel costs, as well as a $7.8
million increase in building, facility and depreciation related expenses.
Additionally, there was a $2.3 million increase in consultant costs and a $2.2
million increase in computer and software expenses, which were partially offset
by a $2.1 million decrease in legal, accounting and tax fees.

Interest and other income, net



                                         Year Ended December 31,            

Change

(in thousands, except percentages)       2021               2020            $           %

Interest and other income, net $1,668 $6,590 ($4,922) (75)%


The $4.9 million decrease in interest and other income, net was primarily
attributable to a $4.8 million decrease in net interest income and investment
amortization resulting from reductions in interest rates and related yields of a
smaller portfolio.

Adjusted EBITDA

Adjusted EBITDA is a non-GAAP financial measure that we define as net loss
attributable to Adaptive Biotechnologies Corporation adjusted for interest and
other income, net, income tax (expense) benefit, depreciation and amortization
and share-based compensation expenses.

Management uses Adjusted EBITDA to evaluate the financial performance of our
business and the effectiveness of our business strategies. We present Adjusted
EBITDA because we believe it is frequently used by analysts, investors and other
interested parties to evaluate companies in our industry and it facilitates
comparisons on a consistent basis across reporting periods. Further, we believe
it is helpful in highlighting trends in our operating results because it
excludes items that are not indicative of our core operating performance.

Adjusted EBITDA has limitations as an analytical tool and you should not consider it in isolation or as a substitute for analyzing our results as reported under GAAP. We may incur expenses similar to the adjustments in the presentation of Adjusted EBITDA in the future. In particular, we expect to incur significant stock-based compensation expenditures in the future. Other limitations include that Adjusted EBITDA does not reflect:

       • all expenditures or future requirements for capital expenditures or
         contractual commitments;


  • changes in our working capital needs;


• income tax benefit (expense), which may be a necessary part of our

operating costs and capacity;

• the cost of replacing depreciated and depreciated assets, which

         will often have to be replaced in the future;


  • the non-cash component of employee compensation expense; and

• the impact of income or expense resulting from matters that we consider not to be

reflect, on a recurring basis, our current operations.

Additionally, Adjusted EBITDA may not be comparable to similarly titled measures used by other companies in our industry or across different industries.

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The following is a reconciliation of net loss attributable to Adaptive
Biotechnologies Corporation to Adjusted EBITDA for the periods presented (in
thousands):



                                                        Year Ended December 31,
                                                   2021           2020           2019
Net loss attributable to Adaptive
Biotechnologies Corporation                     $ (207,279 )   $ (146,227 )   $  (68,606 )
Interest and other income, net                      (1,668 )       (6,590 )       (9,785 )
Depreciation and amortization expense               13,953          8,472   

7,791

Share-based compensation expense (1)                43,251         24,761         13,124
Adjusted EBITDA                                 $ (151,743 )   $ (119,584 )   $  (57,476 )




(1) Represents share-based compensation expense related to option and restricted
stock unit awards. See Note 13 of the accompanying notes to our consolidated
financial statements included elsewhere in this Annual Report on Form 10-K for
details on our share-based compensation expense.

Cash and capital resources

We have incurred losses since inception and incurred negative operating cash flow from inception through December 31, 2018and again in the past years December 31, 2020 and 2021. As of December 31, 2021we had an accumulated deficit of $718.9 million.

We have funded our operations to date principally from the sale of convertible
preferred stock and common stock and, to a lesser extent, sequencing and
development revenue. As of December 31, 2021, we had cash, cash equivalents and
marketable securities of $570.2 million.

We believe our existing cash, cash equivalents and marketable securities will be
sufficient to fund our operating expenses and capital expenditure requirements
through at least the next 12 months. We may consider raising additional capital
to expand our business, to pursue strategic investments, to take advantage of
financing opportunities or for other reasons. If our available cash, cash
equivalents and marketable securities balances and anticipated cash flows from
operations are insufficient to satisfy our liquidity requirements, we may seek
to sell additional equity or convertible debt securities, enter into a 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
shareholders 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. This additional capital may not be available on reasonable
terms, or at all.

We plan to utilize the existing cash, cash equivalents and marketable securities
on hand primarily to fund our commercial and marketing activities associated
with our clinical products and services, continued research and development
initiatives for our pipeline candidates and drug discovery initiatives and
ongoing investments in our immune medicine platform. We also expect to make
capital expenditures in the near term related to the expansion of our laboratory
space and expect to continue investing in laboratory equipment and operations to
support our anticipated growth. Cash in excess of immediate requirements is
invested in accordance with our investment policy, primarily with a view to
capital preservation and liquidity. Currently, our funds are held in money
market funds and marketable securities consisting of U.S. government debt
securities and corporate bonds.

Our contractual obligations as of December 31, 2021 include operating lease
obligations of $149.5 million, reflecting the minimum commitments for our office
and laboratory spaces in Seattle, Washington and South San Francisco,
California, our warehouse lease in Bothell, Washington and our office lease in
New York City, New York, as well as a commitment for server space in Seattle,
Washington. See Note 10 of the accompanying notes to our consolidated financial
statements included elsewhere in this Annual Report on Form 10-K for more
information, including the timing of cash payments related to these lease
obligations. Additionally, we have minimum commitments for laboratory material
suppliers, which are generally fulfilled within one year, software and service
license commitments, which are generally fulfilled within one to three years,
purchase commitments for cloud data storage through our collaboration with
Microsoft and royalty commitments. Furthermore, in connection with one of our
lease agreements, we have an existing letter of credit of $2.1 million with one
of our existing financial institutions.

While we may experience variability in revenue in the near term, as long-term
revenue from sales of our current and future products and services is expected
to grow, we expect our accounts receivable and inventory balances to increase.
Any increase in accounts receivable and inventory may not be completely offset
by increases in accounts payable and accrued expenses, which could result in
greater working capital requirements.

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Cash flow

The following table summarizes our uses and sources of cash for the years ended
December 31, 2021 and 2020 (in thousands):


                                                        Year Ended December 31,
                                                          2021             2020
Net cash used in operating activities                 $    (192,727 )   $ (149,683 )
Net cash provided by (used in) investing activities         181,210       (117,044 )
Net cash provided by financing activities                    27,146        293,587




Operating Activities

Cash used in operating activities during the year ended December 31, 2021 was
$192.7 million, which was primarily attributable to a net loss of $207.3 million
and a net change in operating assets and liabilities of $56.8 million, partially
offset by noncash share-based compensation of $43.3 million, noncash
depreciation and amortization of $21.2 million and noncash lease expense of $7.0
million. The net change in operating assets and liabilities was primarily due to
a $57.7 million reduction in deferred revenue primarily related to revenue
recognized from the Genentech Agreement, a $7.4 million increase in accounts
receivable, net and a $5.2 million increase in inventory, which were partially
offset by an $8.5 million increase in operating lease liabilities, a $3.9
million increase in accounts payable and accrued liabilities primarily related
to our corporate bonus to be paid in 2022, and a $1.3 million decrease in
prepaid expenses and other assets.

Cash used in operating activities during the year ended December 31, 2020 was
$149.7 million, which was primarily attributable to a net loss of $146.2 million
and a net change in our operating assets and liabilities of $40.8 million,
partially offset by noncash share-based compensation of $24.8 million, noncash
depreciation and amortization of $9.2 million and noncash lease expense of $3.3
million. The net change in our operating assets and liabilities was primarily
due to a $43.4 million reduction in deferred revenue primarily related to
revenue recognized from the Genentech Agreement, a $5.0 million increase in
inventory, a $1.4 million increase in prepaid expenses and other current assets
and a $0.9 million decrease in operating lease liabilities. These changes were
partially offset by an increase in accounts payable and accrued liabilities of
$7.5 million and a reduction in accounts receivable, net of $2.6 million.

Investing activities

Cash provided by investing activities during the year ended December 31, 2021
was $181.2 million, which was primarily attributable to proceeds from maturities
of marketable securities of $559.5 million, partially offset by purchases of
marketable securities of $316.5 million and purchases of property and equipment
of $61.7 million.

Cash used in investing activities during the year ended December 31, 2020 was
$117.0 million, which was primarily attributable to purchases of marketable
securities of $695.0 million and purchases of property and equipment of $18.8
million, partially offset by proceeds from sales and maturities of marketable
securities of $596.7 million.

Financing Activities

Cash flows generated by financing activities during the year ended December 31, 2021
has been $27.1 millionprimarily attributable to proceeds from the exercise of stock options.

Cash provided by financing activities during the year ended December 31, 2020
was $293.6 million, which was primarily attributable to $271.8 million in
proceeds, after deducting underwriting discounts and net offering expenses paid
by us, received from our underwritten public offering completed in July 2020, as
well as $21.7 million in proceeds from the exercise of stock options.

Net operating losses carried forward

Utilization of our NOL carryforwards and credits may be subject to a substantial
annual limitation due to the ownership change limitations provided by Section
382 of the Internal Revenue Code of 1986 ("Section 382") and similar state
provisions. The annual limitation may result in the expiration of NOL
carryforwards and credits before utilization. If there should be an ownership
change, our ability to utilize our NOL carryforwards and credits could be
limited. We have completed a Section 382 analysis for changes in ownership
through December 31, 2020 and continue to monitor for changes that could trigger
a limitation. Based on this analysis, we do not expect to have any permanent
limitations on the utilization of our federal NOLs. Under the TCJA, federal NOLs
incurred in 2018 and future years may be carried forward indefinitely, but the
deductibility of such federal NOLs is subject to an annual limitation. NOLs
generated prior to 2018 are eligible to be carried forward up to 20 years. Based
on the available objective evidence, management determined that it was more
likely than not that the net deferred tax assets would not be realizable as of
December 31, 2021. Accordingly, management applied a full valuation allowance
against net deferred tax assets as of December 31, 2021.

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Significant Accounting Policies and Estimates



We have prepared our consolidated financial statements in accordance with GAAP.
Our preparation of these consolidated financial statements requires us to make
estimates, assumptions and judgments that affect the reported amounts of assets,
liabilities and related disclosures at the date of the consolidated financial
statements, as well as revenue and expense recorded during the reporting
periods. We evaluate our estimates and judgments on an ongoing basis. We base
our estimates on historical experience and or other relevant assumptions that we
believe to be reasonable under the circumstances. Estimates are used in several
areas, including, but not limited to, estimates of progress to date for certain
performance obligations and the transaction price for certain contracts with
customers, the provision for income taxes, including related reserves, and
goodwill, among others. These estimates generally involve complex issues and
require judgments, involve the analysis of historical results and prediction of
future trends, can require extended periods of time to resolve and are subject
to change from period to period. Actual results may differ materially from
management's estimates.

Although our significant accounting policies are described in more detail in Note 2 of the Notes to our Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K, we believe that the following accounting policies are material to judgments and estimates used in the preparation of our consolidated financial statements.

Revenue recognition

Our revenue development and sequencing agreements may include upfront payments for the provision of services in the future, which have fixed and variable consideration. Initial non-refundable fees and funding for related development services are generally considered fixed consideration, while milestone payments are identified as variable consideration.

In determining the appropriate amount of revenue to recognize as we fulfill our
obligations under these agreements, we perform the following steps to determine
the amount of revenue to be recognized: (1) identify the contract or contracts;
(2) determine whether the promised goods or services are performance
obligations, including whether they are distinct in the context of the contract;
(3) measure the transaction price, including the constraint on variable
consideration; (4) allocate the transaction price to the performance obligations
based on estimated selling prices; and (5) recognize revenue when (or as) we
satisfy each performance obligation.

A performance obligation is a promise in a contract to transfer a distinct good
or service to the customer and is the unit of account in Accounting Standard
Codification ("ASC") Topic 606, Revenue from Contracts with Customers. Our
performance obligations include sequencing services and services associated with
regulatory submission and approval processes. Significant management judgment is
applied to determine (1) the measurement of the transaction price, including the
constraint on variable consideration, (2) the allocation of the transaction
price to the performance obligations and (3) the appropriate input or output
based method to recognize revenue and the extent of progress to date.

We include the unconstrained amount of estimated variable consideration in the
transaction price. The amount included in the transaction price is constrained
to the amount for which it is probable that a significant reversal of cumulative
revenue recognized will not occur. At the end of each subsequent reporting
period, we re-evaluate the estimated variable consideration included in the
transaction price and any related constraint and, if necessary, adjust our
estimate of the overall transaction price.

To determine the allocation of the transaction price to the performance bonds, we apply the market-adjusted valuation approach. Using this approach, we assess the market in which we are selling the services and estimate the price a customer in that market would be willing to pay for these services.

To select the measure of progress, we consider the expectations of the
performance period which may be based on customer-dependent estimates of samples
or internal estimates of the performance period based on both the customer and
our expected development timeframes. For our collaboration with Genentech, we
estimate the extent of progress using a proportional performance model that uses
an input method based on costs incurred relative to the total estimated costs of
research and development efforts to pursue both the Shared Products and
Personalized Product pathways. These estimates are based on our internal
estimates and development timeframes, which are subject to revision based on the
potential outcomes for both product pathways, decisions made by Genentech,
regulatory feedback or other factors not currently known. We regularly review
our expectations of the extent of progress, including whether any variable
consideration is no longer constrained, and, if any changes in estimates are
made, we recognize revenue using the cumulative catch-up method.

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Good will

Goodwill represents the excess of the purchase price over the net amount of
identifiable assets acquired and liabilities assumed in a business combination
measured at fair value. We assess goodwill for impairment annually on October 1
and upon any occurrence of triggering events or substantive changes in
circumstances that could indicate a potential impairment.

We evaluate goodwill for impairment by first assessing qualitative factors to
determine whether it is more likely than not that the fair value of our
reporting unit is less than its carrying amount. We evaluate certain qualitative
factors such as macroeconomic conditions, the market and industry in which we
operate, cost factors, overall financial performance and other relevant
entity-specific events to determine if there are any negative trends or events
that could indicate impairment. Key assumptions in this analysis include
anticipated demand for our products and services, including industry and
regulatory changes, future revenue growth and cash flow trends. These
assumptions are determined based on our historical performance and management's
forecasted results. Management's estimates of forecasted results are based upon
assumptions believed to be reasonable, but which are inherently uncertain and
unpredictable and, as a result, actual results may differ from estimates. If we
determine that it is more likely than not that the fair value of our reporting
unit is less than its carrying amount, or if we choose to bypass the qualitative
assessment, we perform a quantitative goodwill impairment test. Goodwill
impairment exists when the estimated fair value of our one reporting unit is
less than its carrying value. If impairment exists, the carrying value of the
goodwill is reduced to fair value through an impairment charge recorded in our
consolidated statements of operations. To date, we have not recognized any
impairment of goodwill.

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