Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion of our results of operations and financial condition together with our accompanying consolidated financial statements and the notes thereto included under Item 8. “Financial Statements”. This discussion contains forward-looking statements that involve risks and uncertainties. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry and our business and financial results. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those discussed in the section entitled “Risk Factors” in Part I, Item 1A of this Form 10-K and the section titled “Cautionary Statement Concerning Forward-Looking Statements” of this Annual Report on Form 10-K.
GRAIL, LLC, previously named SDG Ops, LLC, was formed in the state of Delaware as a wholly owned subsidiary of Illumina, Inc. (“Illumina”). SDG Ops, LLC, along with SDG Ops, Inc., a Delaware corporation and wholly owned subsidiary of Illumina, were formed for the purpose of completing a merger transaction between GRAIL, Inc., and Illumina (the “Acquisition”) in order to carry on the business of GRAIL, Inc. and its subsidiaries.
On September 20, 2020, GRAIL, Inc., Illumina and its subsidiaries, SDG Ops, LLC, and SDG Ops, Inc., entered into an agreement and plan of merger (the “Merger Agreement”). On August 18, 2021 (the “Closing Date”), Illumina completed its acquisition of GRAIL, Inc.. According to the terms and conditions of the Merger Agreement, SDG Ops, Inc. and GRAIL, Inc. merged, with GRAIL, Inc. surviving and became a wholly owned subsidiary of Illumina (the “First Merger”). Immediately following the First Merger and as part of the same overall transaction, GRAIL, Inc., as the surviving corporation, merged with SDG Ops, LLC (the “Second Merger”). According to the terms and conditions of the Merger Agreement, SDG Ops, LLC became the surviving company and was renamed GRAIL, LLC.
On June 24, 2024, Illumina completed the previously announced spin-off of GRAIL (the “Spin-Off”) through a distribution of approximately 85.5% of our outstanding common stock to the holders of record of Illumina’s common stock as of the close of business on June 13, 2024 (the “Distribution”). As a result of this Distribution, GRAIL became an independent public entity.
Unless the context otherwise requires, references to "GRAIL," “we,” “us,” and the "Company" refer to (i) GRAIL, LLC and its consolidated subsidiaries prior to the Spin-Off as a carve-out business of Illumina and (ii) GRAIL, Inc. and its subsidiaries following the Spin-Off.
A detailed discussion comparing our results of operations for the years ended December 31, 2023 and January 2, 2022 can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our final Information Statement filed with our Registration Statement on Form 10, as amended, as filed with the SEC.
Overview
Our Business
We are an innovative commercial-stage healthcare company focused on saving lives and shifting the paradigm in early cancer detection. We believe screening individuals for many types of cancer with a single test represents a significant opportunity to reduce the global burden of cancer. Our Galleri test is a commercially available screening test for early detection of multiple types of cancer, which we termed multi-cancer early detection (“MCED”). We believe Galleri is clinically validated based on the results of its clinical studies completed to date, including the results of its foundational case-control Circulating Cell-free Genome Atlas (“CCGA”) study and interventional PATHFINDER study which together enrolled more than 21,000 participants. In these studies, Galleri demonstrated an ability to detect a shared cancer signal across more than 50 types of cancer, accurately predict the specific organ or tissue type where the cancer signal originated, and yield high positive predictive values and low false positive rates, all from a simple blood draw. Galleri results can help guide next steps for diagnosis of cancer by healthcare providers in required follow-up diagnostic testing. We launched Galleri in the United States in mid-2021. We have sold more than 290,000 commercial tests which have detected some of the most aggressive cancers in early stages including, among others, endometrial, esophageal, gastric, head and neck, liver, pancreatic, and rectal cancers.
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Since our inception, we have incurred net losses each year. Our net losses were $2.0 billion for fiscal year 2024 (which includes $1.4 billion of goodwill and intangible assets impairment), $1.5 billion for fiscal year 2023 (which includes $718.5 million of goodwill and intangible assets impairment), and $5.4 billion for fiscal year 2022 (which includes $4.7 billion in goodwill impairment), (see “Basis of Presentation” below for a description of applicable fiscal periods). Adjusted EBITDA was $(483.5) million for fiscal year 2024, $(523.9) million for fiscal year 2023, and $(500.1) million for fiscal year 2022. Adjusted EBITDA is a non-GAAP financial measure. For a reconciliation of Adjusted EBITDA to the most directly comparable U.S. generally accepted accounting principle (“GAAP”) financial measure, information about why we consider Adjusted EBITDA useful and a discussion of the material risks and limitations of these measures, please see “Non-GAAP Financial Measures” below. Substantially all of our net losses resulted from the application of pushdown accounting, including goodwill and intangible assets impairment, amortization of intangible assets, as well as our research and development programs, general and administrative (“G&A”) costs associated with our operations and sales and marketing costs associated with commercializing our products. Additionally, due to the application of pushdown accounting, our balance sheet includes intangible assets recognized by Illumina in connection with their acquisition of us that may be subject to additional impairment over time. We expect to continue to incur operating losses over at least the next several years as we continue to invest in research and development and commercialization of existing products.
Separation from Illumina
On June 24, 2024, Illumina completed the Spin-Off, as described above. See Note 1 — Organization And Description Of Business for details. In connection with the Spin-Off, certain equity and liability classified awards were converted in accordance with the employee matters agreement, as further described in Note 7 — Stock-Based Compensation. As a result of the separation, our member’s equity balance was reclassified to additional paid-in capital.
On June 21, 2024, in connection with the Spin-Off, we received a cash contribution of $932.3 million from Illumina. In connection with the Spin-Off, we incurred $22.2 million of legal and professional fees in the year ended December 31, 2024 related to the 2021 acquisition of GRAIL by Illumina, and corresponding antitrust litigation, including compliance and divestiture of GRAIL from Illumina through the Spin-Off. See “Non-GAAP Financial Measures — Adjusted EBITDA” for further details. In addition, from 2021 to 2024, we spent $143.8 million on legal and professional service fees related to the antitrust litigation and compliance with the hold separate order and transaction costs related to Illumina’s acquisition of GRAIL and the Spin-Off.
Restructuring Plan
On August 9, 2024, following a portfolio review, our Board of Directors (the “Board”) approved a restructuring plan (“Restructuring Plan”) designed to reprioritize our resources to focus on our core MCED business and reduce overall spend as we progress towards completion of registrational studies and premarket approval application (“PMA”) submission to the U.S. Food and Drug Administration (“FDA”) for Galleri.
As a result, we have taken actions to streamline our commercial sales forces and focus their field-based activities on the current customers expected to be more productive and high priority opportunities. We maintained sales force coverage for the majority of our current Galleri volume and active prescribers. As part of this approach, we also streamlined our current and planned investment in our enterprise business, which included our employer and life insurance businesses. Reductions in the commercial organization included management layers and commercial roles without sales responsibilities. In addition to reductions in the commercial organization, we made reductions in medical affairs teams involved with U.S. Galleri provider engagement.
We also substantially decreased investment and planned investment in research and development activities related to our product programs beyond Galleri, including our diagnostic aid for cancer and minimal residual disease programs. In addition, we made reductions in general and administrative expenses to reflect the focus on the MCED opportunity. We plan to continue to invest in our biopharmaceutical partnerships and work with our partners to leverage our proprietary methylation technology in precision oncology applications.
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The decision was based on cost-reduction initiatives intended to reduce our ongoing operating expenses and maximize shareholder value.
The Restructuring Plan included a reduction in our existing headcount and planned 2024 hires of approximately 30%, inclusive of 350 then full-time employees, or approximately 25% of the workforce in place as of June 30, 2024.
The Restructuring Plan was substantially completed in the fourth quarter of 2024, and we incurred approximately $18.3 million of total charges for the year ended December 31, 2024, consisting primarily of employee severance, benefits, payroll taxes, and other associated costs. We expect the headcount reductions to enable future cost savings of approximately $120 million on an annual basis. We estimate that the Restructuring Plan extends our anticipated cash runway from the second half of 2026 into 2028.
Basis of Presentation
The accompanying consolidated financial statements have been prepared on a standalone basis using the consolidated financial statements and accounting records of Illumina prior to the Spin-Off, and the accounting records of GRAIL, Inc. subsequent to the Spin-Off. These consolidated financial statements reflect GRAIL’s consolidated historical financial position, results of operations and cash flows as historically managed, in accordance with GAAP. The Consolidated Financial Statements may not be indicative of GRAIL’s future performance and do not necessarily reflect what the financial position, results of operations and cash flows would have been, and may not include all expenses that would have been incurred, had GRAIL been operated as an independent, publicly traded company during the periods presented. Certain situations require management to make estimates based on judgments and assumptions, which may affect the reported amounts of assets and respective disclosures at the date of the financial statements. Management’s judgments and assumptions may also affect the reported amounts of net sales and expenses during the reporting periods. Actual results could differ from these management estimates.
While GRAIL was a subsidiary of Illumina, GRAIL’s fiscal year was the 52 or 53 weeks ending the Sunday closest to December 31, with quarters of 13 or 14 weeks ending the Sunday closest to March 31, June 30, September 30, and December 31. References to “fiscal year 2023” refer to the period from January 2, 2023 to December 31, 2023, and “fiscal year 2024” refer to the period from January 1, 2024 to December 31, 2024. Upon the closing of the Spin-Off, GRAIL adopted a fiscal year end of December 31.
Illumina’s acquisition of GRAIL on August 18, 2021 (“the Acquisition”) represented a change of control with respect to GRAIL. Given GRAIL, Inc. merged with SDG Ops, Inc., which then merged with SDG Ops LLC, authoritative guidance (ASC 805-50-30) required pushdown accounting to be applied for the Second Merger amongst entities under common control. As a result of the application of pushdown accounting, the separately issued financial statements of GRAIL reflect Illumina’s basis in the assets and liabilities of GRAIL which were remeasured to fair value as of the Closing Date. Intangible assets included developed technology, in-process research and development, and trade names, as well as goodwill.
We expect to incur additional costs as a separate public company. These additional costs are primarily related to certain supporting functions that may differ from and be higher than the costs historically incurred or allocated to us.
The additional costs we expect to incur as a separate public company are summarized as follows:
•Accounting and audit related costs, professional services, and new systems and software to support the accounting, financial reporting, and audits as a standalone public company;
•Professional service costs, for additional support to enhance our capabilities in areas such as investor relations, accounting, financial reporting, treasury, risk management, and equity administration, among others; and
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•Corporate governance costs, including but not limited to board of directors compensation and expenses, insurance, legal and other professional services fees, annual report and proxy statement costs, SEC filing fees, transfer agent fees, and stock exchange listing fees.
In addition, we have entered into a supply and commercialization agreement with Illumina. Under the terms of the agreement, regardless of whether our products incorporate any Illumina technology, we have agreed to pay to Illumina a high single-digit royalty, subject to certain reductions, in perpetuity on net sales generated by our products or revenues otherwise generated or received by us, subject to certain exceptions, in the field of oncology. Per the terms of the Separation and Distribution Agreement with Illumina, the royalty arrangement is suspended until the earlier of December 24, 2026 or any earlier GRAIL Change of Control (as defined in that agreement), at which time the high-single digit royalty will become payable.
Certain factors could impact the nature and amount of these separate public company costs, including the finalization of our staffing and infrastructure needs.
Key Factors Affecting Performance
We believe there are several important factors that have impacted and that we expect will impact our operating performance and results of operations, including:
•FDA and other regulatory approval and reimbursement. Our performance will be impacted by the extent to which we can secure reimbursement and coverage for Galleri. Prior to broader coverage and reimbursement in the United States, we will continue our work with clinics and health systems to accelerate utilization, and with self-insured employers and health insurers to offer and cover Galleri. Galleri is currently available as a laboratory developed test (“LDT”) in the United States and we have established private reimbursement from a number of self-insured employers and health plans, but do not currently have broader coverage and reimbursement by government healthcare programs, such as Medicare. While Galleri has not been approved or cleared by the FDA, FDA approval is currently not required to market our test in the United States. We plan to pursue FDA approval to help support broad access for Galleri in the United States. We plan to complete a PMA submission with the FDA in the first half of 2026. The timing of this submission is subject to various risks and other factors, including the completion of clinical studies and our ongoing discussions with the FDA. Obtaining PMA approval can take several years from the time an application is submitted, if at all. Moreover, the FDA requirements that will govern MCED tests, as well as the breadth and nature of data we must provide the FDA to support the proposed intended use, may be subject to change, and as such it is difficult to predict what information we will need to submit to obtain approval of a PMA from the FDA for a proposed intended use. We continue to interact with the FDA regarding the data we must provide the FDA to support our PMA submission for the proposed intended use. We believe that FDA approval, if obtained, could unlock large commercial payors in the United States and we are supporting proposed legislation in the United States to enable coverage of FDA-approved MCED tests by Medicare. If we obtain FDA approval, we expect to pursue inclusion of Galleri in the USPSTF’s guideline recommendation, although such inclusion is not certain even with FDA approval. We believe such inclusion would further increase adoption and market acceptance of our tests. Over time, to the extent Galleri becomes more accessible in the United States, we may opt to reduce pricing in order to access a broader population base and accelerate adoption. In the United Kingdom, we are working with NHS England to complete our NHS-Galleri Trial. The NHS will evaluate the final results from the NHS-Galleri Trial, which are expected to be available in 2026, before determining whether to implement the Galleri test in the NHS. We believe the decision will include considerations such as NHS budget, political priorities, cost-effectiveness and implementation constraints in addition to an evaluation of the final results. We believe our work with the NHS and data generated from our NHS-Galleri Trial, if favorable, could help facilitate adoption in other single-payor systems around the world and support evidence of clinical utility worldwide.
•International expansion. A component of our long-term growth strategy is to expand our commercial reach internationally. We have expanded our research internationally into the United Kingdom through our partnership with NHS England in the NHS-Galleri Trial, and we expect to launch Galleri in the United Kingdom subject to the results of our NHS-Galleri Trial. We continue to evaluate international expansion
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opportunities and we have begun expansion in select additional geographies through distributors. We expect to continue selectively engaging with international opportunities over time.
•Continued development of the market for MCED testing. Multi-cancer early detection is a relatively novel technology and the market for MCED tests is evolving. We continue to drive MCED as a solution to one of healthcare’s most important challenges. Our performance depends on the extent to which key stakeholders, including current and potential commercial partners, payors and health systems, regulators, policy makers, academic and community medical centers, and key opinion leaders and advocates, understand and support MCED testing as an effective solution for cancer screening. We make significant efforts to educate these key stakeholders regarding the benefits of MCED and the clinical and economic value of our products, which we believe will continue to drive awareness of MCED and expand the commercial opportunity for our products.
•Demand for our products and customer mix. A key factor to our future success is and will be our ability to increase demand for, and sales of, Galleri from new and existing customers. Our commercial strategy is focused on innovative value-oriented partnerships and targets health systems, employers, payors, and life insurance providers. As Galleri is not currently broadly reimbursed, our ability to drive demand from these customers is directly linked to our ability to demonstrate the clinical and economic value of our test through clinical validation and real-world experience. As of December 31, 2024, we have entered into commercial partnerships, including with leading healthcare systems, employers, payors, and life insurance providers, and have established a network of over 13,000 prescribers across the United States in a pre-reimbursement setting. We believe this commercial network represents a significant opportunity to drive further demand for Galleri. The mix of customers from which we generate revenue from period to period has an impact on our revenue and gross margin. Galleri test pricing is generally based on our list price or, for certain customers, such as larger, higher-volume customers, negotiated contractual rates. For certain customers, we also offer rebates or discounts from time to time. Revenue generated from customers with negotiated contractual rates, or with rebates or discounts, is generally lower margin as compared to revenue generated based on list pricing. In addition, we have entered into a number of biopharmaceutical research partnerships for our research-use-only (“RUO”) offering under our precision oncology portfolio. Large customers, such as healthcare systems, employers, and biopharmaceutical partners, generally begin using our products by initiating pilots involving a limited number of tests. We believe that our ability to convert these initial pilots into long-term customer relationships has the potential to drive substantial long-term revenue. We also expect to increase demand from new customers through our efforts to further develop the market for MCED testing.
•Investment in clinical studies and innovation to support our strategy and growth. A significant aspect of our business is our investment in research and development and the ongoing evidence generation supporting the clinical performance and utility of Galleri. In particular, we have invested heavily in clinical studies and designed and executed what we believe is the largest clinical program in genomic medicine to date. These studies include: CCGA, NHS-Galleri, PATHFINDER, PATHFINDER 2, REACH/Galleri-Medicare, REFLECTION, STRIVE, SUMMIT, and SYMPLIFY. We have established and maintained a leading voice in conversations regarding the early detection of multiple cancer types in the peer-reviewed literature. We have published data from these studies in high-profile journals and have presented such data at renowned medical conferences. We believe these studies are critical to driving adoption of our tests, as well as favorable coverage decisions, and expect to continue investment in data generation. In addition, we have invested heavily in the development of our methylation platform and extensive technological infrastructure. We expect our research and development expenses to decrease over the next three years as, in conjunction with our portfolio review, we determined to decrease investment in product programs beyond Galleri. Additionally, some of our large clinical trials are moving into follow-up phase and the development of our automated platform is expected to substantially conclude in 2025. We will continue to prioritize key objectives for Galleri, including completion of our registrational studies and our premarket approval application.
•Leverage our operational infrastructure. We have made significant investments to build a scalable infrastructure capable of meeting significant demand while satisfying applicable certification requirements. Our Durham, North Carolina facility is able to process a substantial number of tests
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annually and is CAP-accredited and CLIA-certified. In addition, we engineered custom technology infrastructure and cloud-based tools to enable scalable data collection and analysis capabilities. With this foundational infrastructure in place, we have been able to generate scale efficiencies as the volume of tests sold has increased. As demand for our products increases, we expect to further leverage the scale efficiencies of our infrastructure and platform technology, which we believe will positively impact margins over time. In the future, it is possible that we may invest significant amounts in infrastructure to support new products or existing products in new markets.
While each of these areas presents significant opportunities for us, they also pose significant risks and challenges that we must address. See “Risk Factors” for more information.
Components of Results of Operations
Screening Revenue
We currently derive screening revenue through the sale of Galleri primarily within the United States and primarily through primary care physicians, health systems, employers, payors, and life insurance providers. Galleri is not currently broadly reimbursed. The test price is based on the negotiated contractual rate with our contracted customers, otherwise our standard list price applies. We identify each sale of our test to our customer as a single performance obligation; therefore, revenue is recognized at the point of time when the test result report is delivered. For self-pay patients, we have concluded that an implied contract exists, however the transaction price for the implied contract represents variable consideration as there are situations in which we do not expect to collect the full invoiced amounts from self-pay patients due to price concessions. We utilize the expected value approach to estimate the transaction price and apply a constraint for such variable consideration, on a portfolio basis. We monitor the estimated amounts to be collected at each reporting period based on actual cash collections in order to assess whether a revision to the estimate is required.
Development Services Revenue
We also derive revenue through our development services, which consist of research services we provide to biopharmaceutical and clinical customers including support of ongoing clinical studies, pilot testing, research, and therapy development. We evaluate the terms and conditions included within our development services contracts with biopharmaceutical customers to ensure appropriate revenue recognition, including whether services are considered distinct performance obligations that should be accounted for separately versus together. Revenue from pilot and research services performed is recognized as performance obligations are achieved. We recognize revenue from development service agreements related to regulatory filing to support clinical study and companion diagnostic device development and regulatory submissions for the developed product(s) using an input method based on costs incurred to measure its progress toward the completion and satisfaction of the performance obligations.
Cost of Screening Revenue (Exclusive of Amortization of Intangible Assets) and Cost of Development Services Revenue
Cost of revenue represents expenses that are incurred to produce and sell our products and services. For screening revenue, these costs consist of materials, labor including salaries and wages, bonus, benefits and stock-based compensation, blood collection kits and shipping, phlebotomy, royalties, electronic medical records, equipment depreciation, and allocations of overhead expenses such as facilities and information technology costs. For development services, these costs consist of materials and patient sample acquisition, labor including salaries and wages, bonus, benefits and stock-based compensation, royalties, equipment depreciation, and allocations of overhead expenses such as facilities and information technology costs.
Cost of Revenue—Amortization of Intangible Assets
As a result of the application of pushdown accounting, intangible assets recognized in our standalone financial statements relate to our own technology, and consist of developed technologies and in-process research and development that were measured at fair value upon the Acquisition. Our developed technology includes intangible assets related to Galleri, designed as a cancer screening test for asymptomatic individuals over 50
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years of age, as well as our diagnostic aid for cancer (“DAC”) that is being designed to accelerate diagnostic resolution for patients for whom there is a clinical suspicion of cancer. As part of our Restructuring Plan, we have reduced, and are further reducing, investment in the development of products beyond Galleri, including DAC. The cost of identifiable intangible assets with finite lives, such as developed technology assets, are amortized on a straight-line basis over the assets’ respective estimated useful lives of 18 years.
Research and Development
Research and development expenses include costs incurred to develop our technology (prior to establishing technological feasibility), collect clinical samples, and conduct clinical studies to develop and support our products. These costs consist of personnel costs, including salaries, benefits, and stock-based compensation expense associated with our research and development personnel, costs associated with setting up and conducting clinical studies at domestic and international sites, laboratory supplies, consulting costs, depreciation, and allocated overhead including facilities and information technology expenses, which we do not allocate by product. We expense both internal and external research and development costs in the periods in which they are incurred. Nonrefundable advance payments for goods and services that will be used or rendered in future research and development activities are deferred and recognized as expense in the period in which the related goods are delivered or services are performed. We expect our research and development expenses to decrease over the next three years as, in conjunction with our portfolio review, we determined to decrease investment in product programs beyond Galleri. Additionally, some of our large clinical studies and development of our automated platform are expected to substantially conclude in this period.
Sales and Marketing
Sales and marketing expenses consist primarily of personnel costs, including salaries, benefits and stock- based compensation expense, consulting costs, allocated overhead including facilities and information technology expenses, and travel associated with our commercial organization. Also included are costs associated with advertising programs that consist of brand and product awareness activities and trade events and conferences. Sales and marketing expense also includes amortization of the trade name intangible asset that was recognized upon the Acquisition, which has been recorded in our financial statements as a result of the application of pushdown accounting. The cost of identifiable intangible assets with finite lives, such as trade names, are amortized on a straight-line basis over the assets’ respective estimated useful lives of 9 years. We expect our sales and marketing expenses to decrease in the near term following implementation of the Restructuring Plan in the third and fourth quarter 2024, and then to remain flat-to-increasing and continue to decrease as a percentage of revenue over the next three years and long term.
General and Administrative
G&A expenses consist of personnel expenses, including salaries, benefits and stock-based compensation expense, for executive, finance and accounting, legal, human resources, business development, corporate communications, medical affairs and management information systems personnel. Also included are professional fees, legal costs, including patent and trademark-related expenses and educational activities. The related party amount represents allocated stock administration expenses from Illumina. We have incurred and will incur additional expenses as a result of operating as a public company, including expenses related to compliance with the rules and regulations of the SEC, director and officer insurance premiums, investor relations activities, and other expenses related to administrative and professional services. We expect our G&A expenses to decrease in the near term following implementation of the Restructuring Plan in the third and fourth quarter 2024, and then remain flat-to-increasing and continue to decrease as a percentage of revenue over the next three years and long term.
Goodwill and Intangible Assets Impairments
Upon the Acquisition, excess consideration over the aggregate fair value of tangible and intangible assets, net of liabilities assumed, was recognized by Illumina as goodwill. As a result of the application of pushdown accounting, the separately issued financial statements of GRAIL reflect the goodwill recorded by Illumina upon the Acquisition.
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On July 13, 2022, the European General Court ruled that the European Commission had jurisdiction under the European Union Merger Regulation to review the Acquisition. Additionally, on September 6, 2022, the European Commission issued a decision prohibiting the Acquisition. These decisions constituted substantive changes in circumstances that would more likely than not reduce the fair value of goodwill. We recognized a goodwill impairment for $4.7 billion in 2022. In the third quarter of 2023, we concluded the sustained decrease in Illumina’s stock price and overall market capitalization during the quarter was a triggering event indicating the fair value of GRAIL might be less than its carrying amount that led us to test goodwill for impairment. We recognized an additional goodwill impairment of $608.5 million in 2023 primarily due to changes to expected timing of revenue and a higher discount rate. In the second quarter of 2024, prior to the Spin-Off, the approval of the Spin-Off by Illumina’s board of directors represented a potential indicator of impairment which also aligned with the timing of Illumina’s annual goodwill impairment test date for 2024. We recognizeda goodwill impairmentof $888.9 millionas a resultof the impairment assessment,primarilyduetochangesto the forecast of GRAIL’s value and the method for valuing GRAIL.
In conjunction with the third quarter of 2023 goodwill impairment assessment described above, the Company also evaluated the IPR&D intangible asset for potential impairment. Based on the impairment test performed, the Company recognized an impairment of $110.0 million, primarily due to a decrease in projected cash flows and a higher discount rate selected for the fair value calculation. In conjunctionwith Illumina’s second quarter of 2024 goodwill impairmentassessment,the IPR&D intangibleasset of the GRAIL reporting unit was evaluated forpotentialimpairment by Illumina prior to the Spin-Off.Basedontheimpairmenttestperformed,the Company recognizedan impairmentof $420.0 million primarily due to changes to revenue projections and the discount rate utilized. Subsequent to the Spin-Off, the Company performed a portfolio review and determined to decrease investment in the development of the IPR&D asset, which impacted the amount and timing of expected future cash flows attributable to IPR&D which represented a potential impairment indicator. Basedontheimpairmenttestperformed,the Company recognizedan additional impairmentof $112.0 million,primarilydue to a decreasein projectedcash flows.
We evaluate goodwill and intangible assets for impairment annually or more frequently if an event occurs or circumstances change in the interim that would more likely than not reduce the fair value of the asset below its carrying amount. See “Note 2 — Summary Of Significant Accounting Policies—Goodwill and Intangible Assets” to our Consolidated Financial Statements.
Interest Income
Interest income consists primarily of interest income earned on our cash, cash equivalents, and short term marketable securities.
Other Income (Expense), Net
Other income (expense), net primarily consists of foreign currency gains and losses as a result of our intercompany agreements.
Benefit from Income Taxes
Upon closing of the Acquisition, as a wholly owned subsidiary of Illumina, we were no longer subject to U.S. income tax on a standalone basis and U.S. income tax was combined into Illumina’s consolidated income tax return as a subsidiary of Illumina. However, for financial statement purposes, we have elected to compute our income tax provision, including current and deferred taxes, as if we filed a separate income tax return and were not included in Illumina’s consolidated return for the period GRAIL was owned by Illumina. Including the provision for income taxes in our standalone financials is more representative of our financial position as a standalone company. As such, the income tax provisions and related deferred tax assets and liabilities reflected in our financial statements for the periods ending December 31, 2023 and January 1, 2023 have been estimated as if we were a separate taxpayer.
Under this method, various tax attributes, such as net operating losses and tax credits, are also presented on a separate return basis. For income tax purposes, since we were not a separate taxpayer and merely a subsidiary of Illumina, these tax attributes, including net operating losses and tax credits, are the property of
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Illumina and have either already been utilized by Illumina in its consolidated or combined income tax returns or will be utilized by Illumina in its returns in the future. Accordingly, such tax attributes will not be available to us as a standalone entity on our income tax returns in the future; therefore, in connection with the Spin-off, we recorded an entry to additional paid in capital in order to remove the tax-effected deferred tax assets, net of any valuation allowance, for the tax attributes that remained the property of Illumina. Following the Spin-off, as a standalone entity, GRAIL files tax returns on its own behalf and its deferred taxes and actual income tax rate may differ from those in historical periods.
Results of Operations
Comparisons of Fiscal Year 2024 to Fiscal Year 2023
The following table summarizes our results of operations for fiscal year 2024 and fiscal year 2023.
Year Ended Change
Revenue:
Costs and operating expenses:
Cost of revenue — amortization of intangible assets 133,889 133,889 — — %
Other income:
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Comparison of Fiscal Year 2024 to Fiscal Year 2023:
Revenue
Year Ended Change
Screening Revenue
The increase in screening revenue of $33.6 million was primarily driven by a 46% increase in Galleri sales volume, offset by a 1% decrease in average selling price (“ASP”). The Galleri sales volume increased in 2024 as a result of the continued ramp in our commercial activity and partnerships, expansion of our network of ordering providers, increased orders from existing providers and new promotional campaigns.
Development Services Revenue
The decrease in development services revenue of $1.1 million was primarily due to a decrease of $0.8 million in revenue from pilots with biopharmaceutical partners as a result of milestones earned in 2023 that did not reoccur and a decrease of $1.1 million in other services revenue, partially offset by an increase of $0.6 million in clinical development revenue and an increase of $0.2 million in revenue earned from research services.
Cost of Screening Revenue (Exclusive of Amortization of Intangible Assets)
Year Ended Change
The increase in cost of screening revenue (exclusive of amortization of intangible assets) of $15.3 million was primarily driven by an increase in test volume. Cost of screening revenue (exclusive of amortization of intangible assets) as a percent of revenue decreased in 2024 primarily due to improved efficiency in Galleri testing related to scalability with increased Galleri sales volume.
Cost of Development Services Revenue
Year Ended Change
Cost of development services revenue $ 6,444 $ 6,861 $ (417) (6 %)
The decrease in cost of development services revenue of $0.4 million was primarily due to a decrease in labor costs associated with development services projects completed during the periods, partially offset by increases in overhead and materials expenses.
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Research and Development
Research and development expenses for fiscal years 2024 and 2023 were as follows:
Year Ended Change
Laboratory supplies and research collaboration expenses 43,205 41,863 1,342 3 %
The decrease in the research and development expenses of $16.4 million was primarily attributable to the decrease in compensation expenses and clinical studies.
The decrease of $11.6 million in compensation expenses was primarily related to a decrease of $9.1 million in stock-based compensation, a decrease of $8.0 million in salaries and wages and a decrease of $3.2 million in variable compensation expense primarily due to the reduction in workforce related to the Restructuring Plan, partially offset by an increase of $8.7 million in severance and benefits related to the Restructuring Plan.
The decrease in clinical studies of $10.7 million was primarily due to completion of enrollment in our PATHFINDER 2 study and completion of final study visits in our NHS-Galleri Trial. The increase in laboratory supplies and research collaboration expenses of $1.3 million was primarily driven by the development and validation of our automated platform.
The increase of $3.0 million in allocated expenses was primarily attributable to higher software, IT, and facilities expenses being allocated to the research and development function.
The decrease in depreciation expenses of $1.4 million was primarily driven by fully depreciated assets.
The increase of $2.9 million in other expenses was primarily driven by an increase of $1.9 million in minimum royalty and intellectual property-related expenses, an increase of $1.3 million in the use of contractors and temporary labor, partially offset by a decrease of $0.3 million in cloud computing expenses primarily due to cost optimization efforts.
Sales and Marketing
Year Ended Change
The decrease in sales and marketing expenses of $8.3 million was primarily attributable to a decrease of $2.5 million in compensation expenses primarily related to a decrease in salaries and wages of $4.9 million, a decrease in stock-based compensation of $2.2 million, and a decrease of $0.3 million in variable compensation expense primarily due to the reduction in workforce related to the Restructuring Plan, partially offset by a $4.9 million increase in severance and benefits related to the Restructuring Plan. Third-party marketing professional services expenses decreased by $2.2 million primarily due to a reduction in marketing event activities. Other expenses decreased by $3.6 million primarily due to decreases in allocated facilities expenses as a result of reductions in sales and marketing headcount.
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General and Administrative
Year Ended Change
The increase in general and administrative expenses of $13.6 million was primarily attributable to an increase of $12.3 million in legal and professional services expenses primarily associated with divestiture related advisory costs related to our Spin-Off completed on June 24, 2024. Compensation expenses increased by $1.8 million primarily driven by an increase of $4.0 million in severance and benefits related to the Restructuring Plan, an increase of $0.1 million in stock-based compensation, offset by decreases of $1.4 million in salaries and wages and $0.9 million in variable compensation expense primarily due to the reduction in workforce related to the Restructuring Plan. Costs associated with the use of contractors and temporary labor increased by $0.8 million. Other expenses decreased by $1.3 million primarily due to decreases in facilities costs, net of allocated expenses.
Goodwill and Intangible Assets Impairment
Year Ended Change
As a result of a goodwill impairment assessment performed by Illumina in the second quarter of 2024, a goodwill impairment charge of $888.9 million was recorded, which represents the amount by which the net carrying value of GRAIL exceeded the fair value of GRAIL at the time the quantitative test was performed, primarily due to changes to the forecast of GRAIL’s value and the method for valuing GRAIL. In conjunction with the goodwill impairment assessment, an impairment assessment for our IPR&D intangible assets was performed by Illumina which resulted an impairment charge of $420.0 million primarily due to changes to revenue projections and the discount rate utilized. Subsequent to the Spin-Off, in conjunction with a portfolio review, we determined to reduce investment in the development of the IPR&D asset, which impacted the amount and timing of expected future cash flows attributable to IPR&D which we concluded was a possible indicator of impairment and another IPR&D impairment test was performed. The impairment assessment resulted in an additional impairment charge of $112.0 million primarily due to a decreasein projectedcash flows.
As a result of an impairment assessment performed by Illumina in the third quarter of 2023, a goodwill impairment charge of $608.5 million was recorded which represents the amount by which the carrying value of GRAIL exceeded the fair value of GRAIL upon performing a quantitative test, primarily due to changes to expected timing of revenue and a higher discount rate. In conjunction with the 2023 impairment assessment, an impairment charge of $110.0 million was recorded to the IPR&D intangible asset.
Interest Income
Year Ended Change
The increase in interest income of $18.8 million was primarily driven byan increasein interest earned on our money market funds and short-term marketable securities primarily due to an increase in the balance on hand as a result of the disposal funding provided by Illumina in connection with the Spin-Off.
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Other Expense, net
Year Ended Change
The decrease in other expense of $0.3 million was primarily a result of the fluctuation of foreign currency exchange rates.
Benefit from Income Taxes
Year Ended Change
The increase in benefit from income taxes of $93.4 million was primarily driven by an increase in pretax tax book losses for fiscal year 2024 when compared to fiscal year 2023, with consideration to the impact of the valuation allowance against pre-tax losses, as well as the impairments of intangible assets that reduced the Company’s net deferred tax liabilities.
Non-GAAP Financial Measures
In addition to our results provided throughout this Annual Report on Form 10-K that are determined in accordance with GAAP, this Annual Report on Form 10-K also includes the following non-GAAP financial measures for fiscal year 2024 and fiscal year 2023, which information should be read in conjunction with our audited Consolidated Financial Statements and the related notes and accompanying notes included elsewhere in this Annual Report on Form 10-K:
Adjusted Gross Profit/(Loss)
Adjusted Gross Profit/(Loss) is a key performance measure that our management uses to assess our operational performance, as it represents the results of revenues and direct costs, which are key components of our operations. We believe that this non-GAAP financial measure is useful to investors and other interested parties in analyzing our financial performance because it reflects the gross profitability of our operations, and excludes the costs associated with our sales and marketing, product development, general and administrative activities, and depreciation and amortization, and the impact of our financing methods and income taxes.
We calculate Adjusted Gross Profit/(Loss) as gross profit/(loss) (as defined below) adjusted to exclude amortization of intangible assets and stock-based compensation allocated to cost of revenue. Adjusted Gross Profit/(Loss) should be viewed as a measure of operating performance that is a supplement to, and not a substitute for, operating income or loss from operations, net earnings or loss and other GAAP measures of income (loss) or profitability. The following table presents a reconciliation of gross loss, the most directly comparable financial measure calculated in accordance with GAAP, to Adjusted Gross Profit.
Year Ended
(1) Gross loss is calculated as total revenue less cost of revenue (exclusive of amortization of intangible assets) and cost of revenue — amortization of intangible assets.
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Adjusted EBITDA
Adjusted EBITDA is a key performance measure that our management uses to assess our financial performance and is also used for internal planning and forecasting purposes. We believe that this non-GAAP financial measure is useful to investors and other interested parties in analyzing our financial performance because it provides a comparable overview of our operations across historical periods. In addition, we believe that providing Adjusted EBITDA, together with a reconciliation of net income (loss) to Adjusted EBITDA, helps investors make comparisons between our company and other companies that may have different capital structures, different tax rates, different operational and ownership histories, and/or different forms of employee compensation.
Adjusted EBITDA is used by our management team as an additional measure of our performance for purposes of business decision-making, including managing expenditures. Period-to-period comparisons of Adjusted EBITDA help our management identify additional trends in our financial results that may not be shown solely by period-to-period comparisons of net income or income from operations. Our Management recognizes that Adjusted EBITDA has inherent limitations because of the excluded items, and may not be directly comparable to similarly titled metrics used by other companies.
We calculate Adjusted EBITDA as net income (loss) adjusted to exclude interest (income) expense, income tax expense (benefit), depreciation, impairment of goodwill and intangible assets, and amortization of intangible assets, which represent intangible assets resulting from pushdown accounting, legal and professional services fees related to the Acquisition and corresponding antitrust litigation, including compliance with the hold separate arrangements imposed by the European Commission and our divestment from Illumina, restructuring charges, and stock-based compensation. We believe that the items subject to these further adjustments are not indicative of our ongoing operations due to their nature, especially considering the impact of certain items as a result of the Acquisition.
Adjusted EBITDA should be viewed as a measure of operating performance that is a supplement to, and not a substitute for, operating income or loss from operations, net earnings or loss and other U.S. GAAP measures of income (loss). Additionally, it is not intended to be a measure of free cash flow for management’s discretionary use, as it does not consider certain cash requirements such as interest and tax payments. Further, our definition of Adjusted EBITDA may differ from similarly titled measures used by other companies and therefore may not be comparable among companies. The following table presents a reconciliation of net loss, the most directly comparable financial measure calculated in accordance with U.S. GAAP, to Adjusted EBITDA on a consolidated basis.
Year Ended
Adjusted to exclude the following:
(1) Represents amortization of intangible assets, including developed technology and trade names.
(2) Reflects impairment of goodwill and intangible assets recognized as a result of the Acquisition.
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(3) Represents legal and professional services costs associated with the Acquisition and corresponding antitrust litigation, including compliance with the hold separate arrangements imposed by the European Commission, and legal and professional services costs associated with the divestiture.
(4) Represents all stock-based compensation recognized on our standalone financial statements for the periods presented.
(5) Represents employee severance, benefits, payroll taxes, and other costs associated with the Restructuring Plan.
Liquidity and Capital Resources
Sources of Liquidity
From inception through the closing date of Illumina’s acquisition of GRAIL, we had funded our operations primarily through the sale and issuance of redeemable convertible preferred stock and receipt of continuation payments from Illumina. Post- Acquisition until completion of the Spin-Off, we received funding on a quarterly basis directly from Illumina. On June 21, 2024, in connection with the Spin-Off, we received a cash contribution of $932.3 million from Illumina. As of December 31, 2024, our cash and cash equivalents totaled $214.2 million and our short-term marketable securities totaled $549.2 million.
Future Funding Requirements
We began generating revenue in mid-2021, but we have continued to incur significant losses and negative cash flows from operations. Subsequent to the Acquisition, we have incurred net losses of $(9.8) billion which includes cumulative charges for impairment of goodwill and intangible assets of $(6.8) billion as well as $(461.1) million of cumulative intangible asset amortization expense as a result of pushdown accounting. We expect to incur additional losses as we conduct our research and development efforts and seek to achieve broad reimbursement of our current commercialized products. We believe that our existing cash and cash equivalents and short-term marketable securities, will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months, as of the date of this Annual Report on Form 10-K. However, we anticipate that we will need to raise additional financing in the future to fund our operations. Our future capital requirements will depend on many factors, including the timing and extent of spending to support commercialization, market acceptance of our products prior to broad reimbursement, the timing of broad reimbursement, and launch of pipeline products. We are subject to typical risks associated with an early-stage commercial company and are developing the market for multi-cancer early detection. We may encounter complications with executing our business plans that may cause unforeseen expenses and adversely affect our business.
We may in the future enter into arrangements to acquire or invest in complementary businesses, services, technologies, and intellectual property rights. We may be required to seek additional capital through equity or debt financing. In the event that additional financing is required, we may not be able to raise it on terms acceptable to us or at all. If we raise additional funds through the issuance of additional debt or equity securities, it could result in dilution to our existing stockholders, increased fixed payment obligations, and the existence of securities with rights that may be senior to those of our common stock. If we incur indebtedness, we could become subject to covenants that would restrict our operations. We are also restricted in our ability to raise money through certain transactions or with certain parties pursuant to the terms of the Tax Matters Agreement we entered into with Illumina on June 24, 2024 in connection with the Spin-Off. We may also choose to raise funds through collaborations and licensing arrangements, in which case we may relinquish significant rights or grant licenses on terms that are not favorable to us. If we are unable to raise additional capital when desired, our business, results of operations, and financial condition would be adversely affected.
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The following table summarizes our cash flows for the periods presented:
Year Ended
Net cash used by operating activities $ (577,156) $ (595,800)
Net cash used by investing activities (551,011) (12,887)
Net Cash Used by Operating Activities
During fiscal year 2024, net cash used by operating activities consisted of a net loss of $2.0 billion, adjusted by non-cash charges of $1.5 billion,$53.8 million cash payments for equity awards, and cash used by changes in our operating assets and liabilities of $24.3 million. The non-cash adjustments primarily consisted of goodwill and intangible assets impairment of $1.4 billion, depreciation and amortization of $158.1 million, and stock-based compensation expense of $86.1 million, which was partially offset by a non-cash benefit of $134.3 million relating to deferred taxes. Changes in operating assets and liabilities was predominantly driven by a decrease in accounts payable of $14.6 million, a decrease in accrued and other liabilities of $12.9 million, and an increase in accounts receivable of $3.4 million, partially offset by a decrease in supplies of $3.1 million, a decrease in prepaid expenses and other current assets of $1.8 million, and a decrease in operating lease assets and liabilities of $1.7 million.
During fiscal year 2023, net cash used by operating activities consisted of a net loss of $1.5 billion, adjusted by non-cash charges of $939.1 million, $76.9 million cash payments for equity awards, and cash provided by changes in our operating assets and liabilities of $7.7 million. The non-cash adjustments primarily consisted of goodwill and intangible assets impairment of $718.5 million, depreciation and amortization of $158.7 million, and stock-based compensation expense of $97.2 million, which was partially offset by a non-cash benefit of $38.2 million relating to deferred taxes. Changes in operating assets and liabilities was predominantly driven by a decrease in operating lease assets and liabilities of $6.7 million, an increase in accounts payable of $2.9 million, and an increase in accrued and other liabilities of $2.4 million, partially offset by an increase in supplies of $1.9 million, an increase in accounts receivable of $1.4 million, and an increase in prepaid expenses and other current assets of $0.9 million.
Net Cash Used by Investing Activities
During fiscal year 2024, net cash used by investing activities primarily consisted of purchases of marketable securities of $545.8 million and $5.2 million for capital expenditures primarily related to purchases of machinery and equipment for use in our laboratories.
During fiscal year 2023, net cash used by investing activities primarily consisted of $12.9 million for capital expenditures primarily related to purchases of machinery and equipment for use in our laboratories.
Net Cash Provided by Financing Activities
During fiscal year 2024, net cash provided by financing activities primarily consisted of $1.2 billion in funding received from Illumina.
During fiscal year 2023, net cash provided by financing activities primarily consisted of $464.0 million in funding received from Illumina, offset by $0.2 million of taxes paid related to net share settlement of equity awards.
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Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements.
Material Cash Requirements
Our material cash requirements include the following contractual and other obligations as of December 31, 2024:
Leases
Historically, we have entered into operating leases for facilities and equipment used for research and development. Operating leases have remaining lease terms which range from 1 year to 9 years, and often include one or more options to renew. These renewal terms can extend the lease term from 5 to 15 years and are included in the lease term when it is reasonably certain that the option will be exercised. The exercise of lease renewal and termination options are at the sole discretion of GRAIL. We also have variable lease payments that are primarily comprised of common area maintenance and utility charges. As of December 31, 2024, we had undiscounted operating lease payment obligations of $86.0 million, with $15.2 million payable within twelve months of December 31, 2024.
Purchase Commitments
Contractual obligations represent future cash commitments and liabilities under agreements with third parties and exclude purchase orders for goods and services that are cancellable. Our non-cancelable purchase orders represent authorizations to purchase rather than binding agreements. The Company’s contractual commitment amounts are associated with agreements that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum services to be used; fixed, minimum, or variable price provisions; and the approximate timing of the transaction. The purchase commitments primarily relate to contractual commitments for future use of web services, laboratory supplies and marketing events in the normal course of business. As of December 31, 2024, we had non-cancelable purchase obligations of $60.3 million, with $21.1 million payable within twelve months of December 31, 2024.
Minimum Royalties
Minimum royalty payments are associated with licensing agreements related to research efforts. Minimum annual royalty payments do not include royalties that would be payable on net sales of Galleri or any future products, pursuant to existing agreements and licenses with Illumina, The Chinese University of Hong Kong, and other third parties in excess of minimum annual royalty payments. As of December 31, 2024, we had minimum royalties of $6.8 million, with $1.0 million payable within twelve months of December 31, 2024.
Critical Accounting Estimates
This discussion and analysis of our financial condition and results of operations is based on our audited Consolidated Financial Statements, which have been prepared in accordance with U.S. GAAP. The preparation of these audited Consolidated Financial Statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the audited Consolidated Financial Statements, as well as the reported expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are described in more detail in the notes to our audited Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K, we believe that the following accounting policies are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.
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Revenue
Our revenue is derived from screening and development services. Screening revenue includes cancer screening testing services provided to patients. Patients obtain tests via their employers, healthcare systems, payors, concierge medicine practices, or life insurance providers, or they can order the test via telemedicine (collectively referred to as our direct customers).
Screening Revenue
We recognize screening revenue from the sale of cancer screening testing services for patients. The test price is based on the negotiated contractual rate with our direct customers, otherwise our standard list price applies. For each specimen received, testing services are performed and test results are electronically delivered to the ordering physician. We identify each sale of our test to a customer as a single performance obligation; therefore, revenue is recognized at the point of time when the test result report is delivered.
For self-pay patients, we have concluded that an implied contract exists, however the transaction price for the implied contract represents variable consideration as there are situations in which we do not expect to collect the full invoiced amounts from self-pay patients due to price concessions. We utilize the expected value approach to estimate the transaction price and apply a constraint for such variable consideration, on a portfolio basis. We monitor the estimated amounts to be collected at each reporting period and assess whether a revision to the estimate is required based on the actual cash collections. Both the estimate and any subsequent revisions are subject to uncertainty and require significant judgment in the estimation and application of the constraint for such variable consideration. We analyze our actual cash collections over the expected collection period and compare it with the estimated variable consideration for each portfolio. The difference is then recognized as an adjustment to revenue when we do not believe there is a probable revenue reversal.
Development Services Revenue
We have developed a breakthrough methylation-based technology which is utilized by biopharmaceutical companies in research and clinical studies, and companion diagnostic development. For contracts with multiple performance obligations, the transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. We determine standalone selling price by considering the historical selling price of these performance obligations in similar transactions as well as other factors, including, but not limited to, the price that customers in the market would be willing to pay, competitive pricing of other vendors, industry publications and current pricing practices, and expected costs of satisfying each performance obligation plus appropriate margin; or by using the residual approach if standalone selling price is not observable, by reference to the total transaction price less the sum of the observable standalone selling prices of other performance obligations promised in the contract.
Biopharmaceutical partners engage with us to run pilot and research studies by sending patient samples and comparing our test result to their expected result for evaluation of performance and application. We recognize revenue as performance obligations are completed.
Following favorable results from pilot and research studies, biopharmaceutical partners may enter into development service agreements with us related to clinical study and companion diagnostic device development and regulatory submissions for the developed product(s). These agreements typically have multiple commitments of services and therefore, have longer performance periods. We use an input method based on costs incurred to measure our progress toward the completion and satisfaction of the performance obligations. We assess the changes to the total expected cost estimates as well as any incremental fees negotiated resulting from changes to the scope of the original contract in determining the revenue recognized at each reporting period.
Accrued Clinical Studies and Research and Development Expenses
We accrue for estimated costs of research and development activities conducted by third-party service providers, including those conducting clinical studies. We record the estimated costs of research and development activities based upon the estimated amount of services provided and include these costs in accrued liabilities in our consolidated balance sheets and within research and development expenses in our consolidated
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statements of operations. These costs are a significant component of our research and development expenses. We accrue for these costs based on factors such as estimates of the work completed and in accordance with agreements established with our third-party service providers. We make judgments and estimates in determining the accrued liabilities balance in each reporting period.
Stock-Based Compensation
Prior to the Spin-Off, we compensated our employees through a long-term incentive program that included GRAIL cash-based equity incentive awards (“Cash-Based Equity Awards”). As these awards were indexed to the value of GRAIL and settled in cash, they were accounted for under ASC 718 Compensation - Stock Compensation as a liability- classified award because the substantive terms of the award required cash settlement on each vesting date. Under ASC 718, we elected to expense the compensation cost over the life of the award via a straight-line method, recognized in stock-based compensation expense. This method resulted in the amount of compensation cost recognized as of any date being at least equal to the earned portion of the expected fair value of the awards on the vest date. Since we did not have actively traded standalone stock, GRAIL’s standalone value calculation was estimated by the Company based on its internal analysis and on input from our independent valuation advisors. To estimate the value of GRAIL, various assumptions were used, including assumptions related to our long-range financial projections, applicable discount rate and terminal growth rate. While we believe the assumptions used were reasonable, assumptions are inherently subject to uncertainty and, as previously noted, small variations in these assumptions could have had a significant impact on the concluded value.
The value of the Cash-Based Equity Awards was recorded over the respective vesting periods of the Cash-Based Equity Awards, with recognition of a corresponding liability recorded in incentive plan liabilities in the consolidated balance sheets. The Cash-Based Equity Awards were remeasured at each reporting date until settlement, with changes in value recognized in stock-based compensation expense. On April 30, 2024, Illumina’s Compensation Committee approved an adjustment of the ordinary course payouts of the Cash-Based Equity Awards providing that the Cash-Based Equity Awards would be paid based on their nominal (face) value without adjustment based on changes in equity value. Subsequent to this adjustment to the Cash-Based Equity Awards and continuing until the Spin-Off, the Cash-Based Equity Awards expensed based on such nominal (face) value in accordance with their applicable vesting schedules.
In connection with the Spin-Off, pursuant to the Employee Matters Agreement, our Cash-Based Equity Awards were modified (the “Award Modification”). Our cash settled, liability-classified awards were modified into RSUs that will be settled in shares of our common stock upon vesting. The unvested performance stock options held by certain GRAIL employees to purchase Illumina stock were converted to options to purchase our common stock. See Note 7 — Stock-Based Compensation for further details of the Award Modification.
The grant date fair value of RSUs and deferred stock units (“DSUs”) are determined based on the closing market price of our common stock on the date of the grant, but (i) in the case of RSUs resulting from the Award Modification, were based on the closing market price of GRAIL’s common stock on the date of the Award Modification, and (ii) in the case of DSUs resulting from deferrals of director cash fees, are determined based on the closing market price of GRAIL’s common stock on the date on which such fees would have been otherwise paid). Stock-based compensation expense is recognized based on the fair value on a straight-line basis over the requisite service periods of the RSUs and DSUs.
The fair value of performance stock options with service conditions is determined using the Black-Scholes-Merton option-pricing model. The model assumptions include expected volatility, term, dividends, and the risk-free interest rate. The expected volatility is generally determined by weighing the historical and implied volatility of peer companies’ common stock. The expected term is our best estimates based on the vesting period and contractual term. Given that cash dividends were never declared or paid on the Illumina nor our common stock, the expected dividend yield is determined to be 0%. We do not anticipate paying cash dividends in the foreseeable future. The risk-free interest rate is based upon U.S. Treasury securities with remaining terms similar to the expected term of the stock-based awards. The fair value of the performance stock options begins to be recognized when it is probable that the performance-based condition will be met.
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Goodwill and Indefinite-Lived Intangible Assets Impairment
Goodwill represents the costs in excess of the fair value of net assets of GRAIL acquired by Illumina in August 2021. Indefinite-lived intangible assets consist of GRAIL’s in-process research and development (“IPR&D”) and were measured by Illumina at fair value as of the Closing Date.
We test goodwill and indefinite-lived intangible assets for impairment annually or more frequently if an event occurs or circumstances change in the interim that would more likely than not reduce the fair value of the asset below its carrying amount. Goodwill and indefinite-lived intangible assets are considered to be impaired when the carrying value of a reporting unit or asset exceeds its fair value. GRAIL currently has only one reporting unit; and therefore, we measure the carrying value against the fair value of the Company.
In the evaluation of goodwill for impairment, we first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting entity is less than its carrying value. If we determine that it is more likely than not for a reporting unit’s fair value to be greater than its carrying value, a calculation of the fair value is not performed. If we determine that it is more likely than not for a reporting unit’s fair value to be less than its carrying value, a calculation of the fair value is performed and compared to the carrying value of that reporting unit. In certain instances, we may elect to forgo the qualitative assessment and proceed directly to the quantitative impairment test. If the carrying value of a reporting unit exceeds its fair value, goodwill of that reporting unit is impaired and an impairment loss is recorded equal to the excess of the carrying value over its fair value.
Generally, we measure the fair value of the reporting unit based on a present value of future discounted cash flows. The discounted cash flow models indicate the fair value of the reporting units based on the present value of the cash flows that the reporting units are expected to generate in the future. Significant estimates in the discounted cash flow models include the weighted average cost of capital, revenue growth rates, long-term rate of growth, and profitability of our business.
Discount rates were determined using a weighted average cost of capital for risk factors specific to us and other market and industry data. In the most recent analysis, a discount rate of 51.5% was used for the goodwill assessment and 46.5% and 20% was used for the intangible assets assessments. The estimates and assumptions used in our assessment represent a Level 3 measurement because they are supported by little or no market activity and reflect our own assumptions in measuring fair value. Specifically for the recent goodwill impairment analysis, valuation estimates from financial advisors derived from revenue multiples from peer public companies was used. For the recent indefinite-lived intangible assets impairment analysis, discount rate estimates derived from the American Institute of Certified Public Accountants (“AICPA”) Accounting and Valuation Guide were used. The assumptions used are inherently subject to uncertainty and we note that small changes in these assumptions could have a significant impact on the concluded value.
Income Taxes
Our provision for income taxes, deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect our best assessment of estimated future taxes to be paid. Judgments and estimates based on interpretations of existing tax laws or regulations in the United States and foreign jurisdictions where we are subject to income tax are required in determining our provision for income taxes. Changes in tax laws, regulations, or statutory tax rates (including the implementation of global minimum tax rates in certain jurisdictions), and estimates of our future taxable income could impact the deferred tax assets and liabilities provided for in the consolidated financial statements and would require an adjustment to the provision for income taxes.
Deferred tax assets are regularly assessed to determine the likelihood they will be recovered from future taxable income. A valuation allowance is established when we believe it is more likely than not the future realization of all or some of a deferred tax asset will not be achieved. In evaluating our ability to recover deferred tax assets within the jurisdiction which they arise, we consider all available positive and negative evidence.
We recognize the impact of a tax position in our consolidated financial statements only if that position is more likely than not of being sustained upon examination by taxing authorities, based on the technical merits of the position. Due to the complexity of some of the uncertainties, the ultimate resolution may result in payments that
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are materially different from our current estimate of the tax liability. These differences, as well as any interest and penalties, will be reflected in the provision for income taxes in the period in which they are determined.
JOBS Act
We are an emerging growth company under the Jumpstart our Business Startups Act of 2012 (the “JOBS Act”). As an emerging growth company, we may delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have nonetheless irrevocably elected not to avail ourselves of this exemption and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies.
We will remain an emerging growth company until the earliest to occur of the following: (i) the last day of the fiscal year in which our total annual gross revenues first meet or exceed at least $1.235 billion (as adjusted for inflation), (ii) the date on which we have, during the prior three-year period, issued more than $1.0 billion in non-convertible debt, (iii) the last day of the fiscal year in which we (a) have an aggregate worldwide market value of common stock held by non-affiliates of $700 million or more (measured at the end of each fiscal year) as of the last business day of our most recently completed second fiscal quarter and (b) have been a reporting company under the Exchange Act for at least one year (and have filed at least one annual report under the Exchange Act), or (iv) the last day of the fiscal year following the fifth anniversary of the date of the first sale of our common stock pursuant to an effective registration statement under the Securities Act.
Recent Accounting Pronouncements
See Note 2 — Summary Of Significant Accounting Policies to our audited Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for details of recent accounting pronouncements.
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Sensitivity
We are exposed to market risk related to changes in interest rates related primarily to our cash, cash equivalents and marketable securities. We had cash and cash equivalents of $214.2 million as of December 31, 2024, which consisted primarily of bank deposits, money market funds, and marketable securities. Our marketable securities are held in U.S. government treasury bills. As of December 31, 2024, we had short-term marketable securities of $549.2 million. Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of the interest rates in the United States. The primary objective of our investment activities is to preserve capital to fund our operations. We do not enter into investments for trading or speculative purposes.
Our investments are subject to interest rate risk and could fall in value if market interest rates increase. Due to the short-term duration of our investment portfolio and the low-risk profile of our investments, a hypothetical 10% relative change in interest rates during any of the periods presented would not have had a material impact on our Consolidated Financial Statements.
Foreign Currency Sensitivity
The majority of our transactions occur in U.S. dollars. However, we do have certain transactions that are denominated in currencies other than the U.S. dollar, primarily the British pound, and we therefore are subject to foreign exchange risk. The fluctuation in the value of the U.S. dollar against the foreign currencies affects the reported amounts of expenses, assets, and liabilities associated with certain activities. We do not currently engage in any hedging activity to reduce our potential exposure to currency fluctuations, although we may choose to do so in the future. A hypothetical 10% change in foreign exchange rates during any of the periods presented would not have had a material impact on our Consolidated Financial Statements.
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Item 8. Financial Statements and Supplementary Data
INDEXTO CONSOLIDATEDFINANCIALSTATEMENTS
Page
Report of Independent Registered Public Accounting Firm (PCAOB ID: 42) F-2
Audited Consolidated Financial Statements
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Comprehensive Loss F-5
Consolidated Statements of Equity F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-8
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Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directorsof GRAIL,Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of GRAIL, Inc. (the Company) as of December 31, 2024 and 2023, the related consolidated statements of operations, comprehensive loss, equity and cash flows for each of the three years in the period ended December 31, 2024, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2024 and 2023, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2024, in conformity with U.S. generally accepted accounting principles.
BasisforOpinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/Ernst & Young LLP
WehaveservedastheCompany’sauditorsince2023.
San Diego, California
March 5,2025
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GRAIL, Inc.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share data)
As of December 31,
Assets
Current assets:
Short-term marketable securities 549,236 —
Prepaid expenses and other current assets(3) 17,447 20,141
Liabilities and stockholders’/member’s equity
Current liabilities:
Incentive plan liabilities — 54,513
Operating lease liabilities, current portion 13,260 14,809
Operating lease liabilities, net of current portion 54,881 69,598
Other non-current liabilities 2,236 1,498
Commitments and contingencies (Note 9)
Stockholders’/member’s equity:
Accumulated other comprehensive income 1,451 1,066
Total liabilities and stockholders’/member's equity $ 2,983,307 $ 3,913,814
(1)Includes related party accounts receivable, net of $65 and $80, respectively.
(2)Includes related party supplies of $3,130 and $5,855, respectively.
(3)Includes related party prepaid expenses and other current assets of $77 and $41, respectively.
(4)Includes related party property and equipment, net of $2,227 and $3,640, respectively.
(5)Includes related party accounts payable of $— and $168, respectively.
(6)Includes related party accrued liabilities of $104 and $95, respectively.
See accompanying notes to consolidatedfinancialstatements.
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GRAIL, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
Year Ended
Revenue:
Costs and operating expenses:
Other income:
Other income (expense), net 64 (208) (238)
Net loss per share — Basic and Diluted $ (63.54) $ (47.21) $ (173.89)
(1)Includes related party screening revenue of $460, $652 and $694, respectively.
(2)Includes related party cost of screening revenue of $13,091, $8,532 and $4,142, respectively.
(3)Includes related party cost of development services revenue of $637, $238 and $227, respectively.
(4)Includes related party research and development expenses of $18,843, $19,508 and $18,780, respectively.
(5)Includes related party general and administrative expenses of $104, $206 and $614, respectively.
See accompanying notes to consolidated financial statements
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GRAIL, Inc.
CONSOLIDATED STATEMENTSOF COMPREHENSIVELOSS
(Amounts in thousands)
Year Ended
Other comprehensive income:
Net unrealized gain on marketable securities, net of tax 266 — —
Foreign currency translation adjustment 119 172 579
See accompanying notes to consolidatedfinancialstatements.
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GRAIL, Inc.
CONSOLIDATED STATEMENTSOFEQUITY
(Amounts in thousands, except share data)
Common Stock
Stock-based compensation expense — — 9,884 — — — 9,884
Other comprehensive loss — — — — 579 — 579
Stock-based compensation expense — — 1,773 — — — 1,773
Other comprehensive loss — — — — 172 — 172
Other comprehensive income — — — — 385 — 385
Vesting of restricted stock units 2,844,261 3 — (3) — — —
*See Note 1 — Organization And Description Of Business for more information on the Spin-Off.
See accompanying notes to consolidatedfinancialstatements.
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GRAIL, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Year Ended
Cash flows from operating activities
Adjustments to reconcile net loss to net cash used by operating activities:
Amortization of discount on marketable securities (3,167) — —
Changes in operating assets and liabilities:
Operating lease right-of-use assets and liabilities, net 1,747 6,712 4,924
Cash flows from investing activities
Purchases of marketable securities (545,803) — —
Cash flows from financing activities
Taxes paid related to net share settlement of equity awards — (234) (4,183)
Represented by:
Supplemental cash flow information:
(1)Includes changes in related party accounts receivable of $15, $133 and $(92), respectively.
(2)Includes changes in related party supplies of $2,725, $(871) and $(2,214), respectively.
(3)Includes changes in related party prepaid and other current assets of $(36), $27 and $761, respectively.
(4)Includes changes in related party accounts payable of $(168), $(2,965) and $2,331, respectively.
(5)Includes changes in related party accrued liabilities of $9, $91 and $(2,400), respectively.
(6)Includes related party purchases of property and equipment of $—, $(2,644) and $(1,755), respectively.
See accompanying notes to Consolidated financial statements.
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GRAIL, Inc.
NOTES TO CONSOLIDATEDFINANCIALSTATEMENTS
NOTE 1.ORGANIZATION AND DESCRIPTION OF BUSINESS
GRAIL, Inc. (“GRAIL” or the “Company”),headquarteredin Menlo Park, California, is an innovativecommercial-stagehealthcarecompany focusedon savinglivesandshiftingtheparadigmofearlycancerdetection.The Company’s Galleribloodtest is a commercially available screening test for early detection of multiple types of cancer. GRAIL’s common stock is listed under the ticker symbol “GRAL” on the Nasdaq Stock Exchange.
GRAIL was previously acquired by Illumina, Inc. (”Illumina”) in August 2021, at which point it became a 100% owned subsidiary of Illumina, and held separate as a part of binding hold separate commitments implemented pursuant to orders issued by the European Commission. SeeNote 10 — Legal And Regulatory Proceedingsfor additionaldetails. GRAIL separated from Illumina on June 24, 2024, as described below. GRAIL was a limitedliabilitycompany(“LLC”) from August 19, 2021 to June 21, 2024 when it was converted into a corporation (the “Conversion”) in anticipation of such separation.
Separation from Illumina
On June 24, 2024, (the “Distribution Date”), Illumina completed the previously announced spin-off of GRAIL (the “Spin-Off”). The Spin-Off was completed through a distribution of 85.5% of the Company’s outstanding common stock to the holders of record of Illumina’s common stock as of the close of business on June 13, 2024 (the “Distribution”), which resulted in the distribution of 31.0 million shares of common stock. As a result of the Distribution, the Company became an independent public entity. Illumina’s ownership of GRAIL reduced to 14.5% after the Spin-Off. Unless the context otherwise requires, references to the Company or GRAIL, refer to (i) GRAIL, LLC prior to the Conversion and (ii) GRAIL, Inc. and its subsidiaries following the Conversion.
In connection with the Spin-Off, the Company entered into or adopted agreements that provide a framework for the relationship between the Company and Illumina, including, but not limited to the following:
•Separation and Distribution Agreement — governed the terms and conditions of the Spin-Off and sets forth aspects of the Company’s and Illumina’s relationship following the Spin-Off. See Note 10 — Legal And Regulatory Proceedings for more information regarding the contingencies related to this agreement.
•Tax Matters Agreement — governs the respective rights, responsibilities and obligations of Illumina and the Company after the Spin-Off with respect to all tax matters and includes restrictions to preserve the tax-free status of the Distribution. See Note 13 — Taxes for more information regarding income taxes and Note 10 — Legal And Regulatory Proceedings regarding the contingencies related to this agreement.
•Employee Matters Agreement — addresses employment, compensation, and benefits matters, including the allocation and treatment of assets and liabilities relating to employees and compensation and benefits plans and programs in which GRAIL employees participate, as well as the treatment of cash-based incentive awards in connection with the Spin-Off. See Note 7 — Stock-Based Compensation for further details regarding treatment of equity awards.
•Stockholder and Registration Rights Agreement — governs the respective rights, responsibilities and obligations of Illumina and the Company after the Spin-Off with respect to Illumina’s continuing ownership of GRAIL common stock.
•Supply and Commercialization Agreement Amendment — amends the Company’s supply and commercialization agreement with Illumina, which governs the ongoing supply and commercial relationship, including licensing, royalty payments and intellectual property between GRAIL and Illumina. See Note 15 — Related Party Transactions for more information regarding the royalty arrangements with Illumina.
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GRAIL, Inc.
NOTES TO CONSOLIDATEDFINANCIALSTATEMENTS
Illumina provided the Company with disposal funding (the “Disposal Funding”) in the amount of $932.3 million in accordance with the Separation and Distribution Agreement, subject to a clawback feature in the event that the Company (i) consummates a change in control transaction, sells or licenses substantially all of its assets or adopts a plan of liquidation (collectively, a “GRAIL Change of Control”), or (ii) (1) pays any dividend on, or makes any other distribution in respect of, any shares of its capital stock or other equity or voting interests (other than a stock dividend or a stock split), or otherwise consummates a return of capital from the Company to any of its equity holders or (2) redeems, purchases or otherwise acquires any of its outstanding shares of capital stock or other equity or voting interests (other than the acquisition of any shares in order to effectuate a “net settlement” transaction for the purposes of satisfying tax withholding obligations arising in connection with the grant, vesting, exercise and/or settlement of any outstanding incentive equity awards of GRAIL held by its current or former employees), in each case, prior to September 24, 2025 (the 15-month anniversary of the Distribution Date). If the Company consummates a transaction described in the foregoing clause (i), the Company must return to Illumina a cash amount decreasing over time calculated by reference to the number of months which have elapsed since the Distribution Date at the time of the public announcement of the event giving rise to the change of control. If the Company consummates a transaction described in the foregoing clause (ii), the Company must return to Illumina a cash amount equal to the payments made by the Company in connection with such transaction. The amount of clawback payments made cannot exceed the amount of the initial disposal funding. See Note 10 — Legal And Regulatory Proceedings — Contingencies for details.
Our Abilityto Continue as a Going Concern
The accompanyingconsolidatedfinancialstatementshave been preparedon a going concern basis, which contemplatestherealizationofassetsandthesatisfactionofliabilitiesinthenormalcourseofbusiness.The realizationofassetsandthesatisfactionofliabilitiesinthenormalcourseofbusinessaredependenton,among otherthings,theCompany’sabilitytomanageits netlossandtobecomeprofitableandoperateprofitably,to managethe Company’snegativecashflowsfromoperationsandtogeneratepositivecashflowsfromoperations,andthe Company’s abilitytoobtainfinancingtosupportworkingcapitalrequirements. The Company had $214.2 millionof cash and cash equivalents and $549.2 million of short-term marketable securities as of December 31, 2024.
The Companybelievesthatitsexistingcashandcashequivalents and short-term marketable securities willbesufficienttomeetitsworkingcapitalandcapitalexpenditureneedsforatleastthenext12 months,asofthedatetheseconsolidatedfinancialstatementswerefiled.
FiscalYear
The Company has a fiscal year end of December 31. Prior to the Spin-Off, the Company’s fiscalyear was the 52 or 53 weeks ending the Sunday closest to December 31. References to 2024, 2023 and 2022 referto the fiscalyears ended December 31, 2024, December 31, 2023, and January 1, 2023, respectively,which were all 52 weeks.
NOTE 2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basisof Presentationand Principlesof Consolidation
The accompanyingconsolidatedfinancialstatementsrepresentthehistoricaloperationsof thestandalone GRAILlegalentityandincludepurchaseaccountingadjustmentsandcertaintax adjustmentsasif the CompanyfiledaseparateincometaxreturnandwasnotincludedinIllumina’sconsolidated return for the period of time the Company was owned by Illumina.Allrevenuesandcostsaswellasassetsandliabilitiesdirectlyassociatedwiththebusinessactivityofthe Companyareincludedintheconsolidatedfinancialstatements.
Illumina’s acquisition of GRAIL in August 2021 (“the Acquisition”) represented a change of control with respect to GRAIL. Given GRAIL, Inc. merged with SDG Ops, Inc., which then merged with SDG Ops LLC, authoritative guidance (ASC 805-50-30) required pushdown accounting to be applied for the Second Merger amongst entities under common control. As a result of the application of pushdown accounting, the separately
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GRAIL, Inc.
NOTES TO CONSOLIDATEDFINANCIALSTATEMENTS
issued financial statements of GRAIL reflect Illumina’s basis in the assets and liabilities of GRAIL which were remeasured to fair value as of the closing date of Illumina’s acquisition of GRAIL (“Closing Date”). Intangible assets included developed technology, in-process research and development, and trade names, as well as goodwill. There were also various other purchase price adjustment entries made in connection with the Acquisition that impacted the GRAIL standalone financial statements.
Managementconsideredtheneedtoallocateanysharedcostsincurredbytheparent,Illumina,tothe accompanyingconsolidatedfinancialstatements.As previouslydiscussed,theEuropeanCommissionhad adopted an order requiringIlluminaand GRAILto be held and operatedas distinctand separateentities.As no integration everoccurred,managementconcludedthatnomaterialallocationsarerequired.However, amountsrecognized by theCompanyarenotnecessarily representativeoftheamountsthatwouldhavebeenreflectedinthefinancialstatementshadtheCompany operatedindependentlyoftheparent.RelatedpartytransactionswithIlluminaarediscussedfurtherin Note 15 — Related Party Transactions.
TheseconsolidatedfinancialstatementsarepreparedinaccordancewithUnitedStatesGenerallyAccepted Accounting Principles(“U.S. GAAP”) and include the accountsof the Companyand its wholly owned subsidiaries.All intercompanybalanceshave been eliminatedin consolidation.
Use of Estimates
The preparationof the consolidatedfinancialstatementsin accordancewith U.S. GAAPrequires managementto makeestimatesand assumptionsthataffecttheamountsof assetsand liabilities,disclosureof contingentassetsand liabilities,and the reportedamountsof revenuesand expenses in the consolidatedfinancial statementsand accompanyingnotes.The Company basesitsestimateson historicalexperienceand othermarket- specificorotherrelevantassumptionsthatitbelievestobereasonableunderthecircumstances.On anongoing basis,managementevaluatesitsestimates,including,butnotlimitedto,thoserelatedtoestimationofvariable consideration,estimationofcreditlosses,standalonesellingpriceincludedincontractswithmultiple performanceobligations,measureofprogresstowardthecompletionandsatisfactionofperformanceobligations, accruedclinicalstudiesand researchand developmentexpenses,stock-basedcompensationexpense, measurementofliability-classifiedawards,valuationofgoodwillandintangibleassets,usefullivesofintangible assetsandpropertyandequipment,determinationofincrementalborrowingrateforoperatingleases, contingencies,andtheprovisionforincometaxes, amongothers.Theseestimatesgenerallyinvolvecomplex issuesandrequirejudgments,involvetheanalysisofhistoricalresultsandpredictionoffuturetrends,canrequire extendedperiodsoftimetoresolveandaresubjecttochangefromperiodtoperiod.Actualresultscoulddiffer fromthoseestimates,and such differencescouldbe materialto theconsolidatedfinancialstatements.
Concentrationof CreditRisk
Financial Instruments
The Company is subject to credit risk from its portfolio of cash, cash equivalents and short-term marketable securities held at three accredited financial institutions. As of December 31, 2024, the Company had approximately $214.2 million of cash deposits and cash equivalents and short-term marketable securities of $549.2 million. The Company limits its exposure to credit losses by investing in money market funds and U.S government treasury securities through U.S. banks with high credit ratings. The Company’s cash consists of deposits held with banks that may at times exceed federally insured limits, however, its exposure to credit risk in the event of default by the financial institution is limited to the extent of amounts recorded on the consolidated balance sheets. The Company performs evaluations of the relative credit standing of these financial institutions to limit the amount of credit exposure. The Company has not experienced any losses in such accounts.
The Company has policy limits for the amount it can invest in any one type of security, except for securities issued or guaranteed by the U.S. government. The goals of the Company’s investment policy, in order of priority, are as follows: minimize risk of the invested capital (including credit risk, interest rate risk and concentration risk), provide liquidity in a timely manner to accommodate operational and capital needs, and subject to the foregoing, seek to generate a reasonable return based on market conditions and given these risk and liquidity guidelines.As
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GRAIL, Inc.
NOTES TO CONSOLIDATEDFINANCIALSTATEMENTS
of December 31, 2024, the Company had no off-balance sheetconcentrationsofcreditrisk. Under its investment policy, the Company limits amounts invested in such securities by credit rating, maturity, investment type and issuer, as a result, the Company is not exposed to any significant concentrations of credit risk from these financial instruments.
Customers
TheCompanyissubjecttocreditriskrelatedtoitsaccountsreceivable.Accountsreceivableprimarilyarise fromtestingservices performed intheUnitedStatesandareprimarilywithbiopharmaceuticalcompanies,employers, healthcareorganizations,conciergemedicinepractices,lifeinsurancecompanies,and individuals.The Company doesnotrequirecollateral.Accountsreceivablearerecordednetoftheallowanceforcreditlosses.
Significant customers are those that represent more than ten percent of total revenue or accounts receivable, net balances for the periods and as of each consolidated balance sheet date presented, respectively. Revenue from a major customer that accounted for 10% or more of total revenue is as follows:
Year Ended
Customers that accounted for 10% of more of total accounts receivable balance are as follows:
As of December 31,
Suppliers
The Company is subject to a concentration risk for equipment, supplies and reagents that are available from a limited number of sources. We source certain laboratory equipment, supplies and reagents used to perform testing services and research and development from single vendors. Historically, we have not experienced significant issues sourcing equipment and supplies needed to perform testing services.
SignificantAccountingPolicies
Cash and Cash Equivalents
Cash and cash equivalentsconsist of cash on deposit with banks denominatedin U.S. Dollars and British Pounds, money market funds, and all highly liquid investments with an original maturity of three months or less.
RestrictedCash
Restrictedcashiscomprisedofcashthatisrestrictedastowithdrawaloruserelatedtolettersofcreditfor theCompany’soperatingleaseagreements.
Short-term marketable securities
The Company classifies its investments as available-for-sale, which consist of high-grade United States (“U.S.”) government treasury bills and are reported at fair value. Management determines the appropriate classification of investments at the time of purchase and re-evaluates such designation as of each balance sheet date. Marketable securities that mature within twelve months from the balance sheet date are classified as short-term marketable securities and those with maturities over twelve months from the balance sheet date are
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GRAIL, Inc.
NOTES TO CONSOLIDATEDFINANCIALSTATEMENTS
classified as long-term marketable securities. Unrealized holding gains and losses are reflected as a separate component of shareholders’ equity in accumulated other comprehensive gain (loss) until realized. Realized gains and losses on the sale of these securities are recognized in net income or loss.
The amended guidance from ASU 2016-13 requires the measurement of expected credit losses for available-for-sale debt securities held at the reporting date over the remaining life based on historical experience, current conditions, and reasonable and supportable forecasts. The Company regularly evaluates its investment portfolio under the available-for-sale debt securities impairment model guidance for indications of possible impairment from credit losses or other factors. For available-for-sale debt securities in an unrealized loss position, the Company evaluates whether a current expected credit loss exists based on available information relevant to the credit rating of the security, current economic conditions and reasonable and supportable forecasts. The Company’s investment portfolio is composed of low-risk, investment grade securities and thus the Company has not recorded an expected credit loss for its investment portfolio.
FairValueofFinancialInstruments
Thefairvalueoffinancialassetsandliabilitiesisdeterminedusingthefairvaluehierarchyestablishedin Accounting Standards Codification(“ASC”) Topic 820, Fair Value Measurement(“ASC 820”). ASC820 identifiesfairvalueastheexchangeprice,orexitprice,representingtheamountthatwouldbereceivedtosellan assetorpaidtotransferaliabilityinanorderlytransactionbetweenmarketparticipants.Thehierarchydescribes threelevelsofinputsthatmaybeusedtomeasurefairvalue,asfollows:
Level1—Observableinputs,suchasquotedpricesinactivemarketsforidenticalassetsandliabilities.
Level2—ObservableinputsotherthanLevel1thatareobservable,eitherdirectlyorindirectly,suchas quotedpricesforsimilarassetsorliabilities,quotedpricesinmarketsthatarenotactive,orotherinputsthatare observableorcanbecorroboratedbyobservablemarketdataforsubstantiallythefulltermoftheassetsor liabilities.
Level3—Unobservableinputsthataresupportedbylittleornomarketactivityandthataresignificantto thefairvalueoftheassetsorliabilities.
Afinancialinstrument’slevelwithinthefairvaluehierarchyisbasedonthelowestlevelofanyinputthatis significantto thefairvaluemeasurement.
The carryingamountsforfinancialinstrumentssuchasaccountsreceivable,net,prepaidexpensesand othercurrentassets,accountspayable, and accruedliabilitiesapproximatefairvaluedue totheirshort-termnature.
AccountsReceivable,Net
Accountsreceivablerepresentunconditionalrightsto considerationfromcustomers.Accountsreceivable areevaluatedregularlyforcollectabilityandpotentialcreditlosses.Allowanceforcreditlossesisestimated basedon management’sassessmentof historicalcollectiontrendsand thefinancialconditionsof customers, among other factors. These reserves are re-evaluated on a regular basis and adjusted, as needed. Once a receivable is deemed to be uncollectible, the receivable balance is charged against the reserve.As of December 31, 2024, and December 31, 2023, the Company had $3.8 million and $3.1 million of allowance for credit losses, respectively.
Supplies
Suppliesconsistsofmaterialsandreagentsconsumedintheperformanceoftestingservices.TheCompany periodicallyanalyzessupplylevelsandexpirationdates,andwritesdown supplythathasbecomeobsoleteorthat hasacostbasisinexcessofexpectedsalesrequirementsascostofrevenue.TheCompanyrecordsanallowance forexcessorobsoletesuppliesusinganestimatebasedonhistoricaltrends, usage forecastsandevaluationofnear-term expirations.
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GRAIL, Inc.
NOTES TO CONSOLIDATEDFINANCIALSTATEMENTS
Propertyand Equipment,Net
Propertyandequipment,netisstatedatcostlessaccumulateddepreciationandamortization.Depreciationis calculatedusingthestraight-linemethodovertheestimatedusefullivesoftheassets.Leaseholdimprovements areamortizedusingthestraight-linemethodovertheshorteroftheleasetermortheusefullifeofthe improvements.Repairexpensesandmaintenancecostsareexpensedasincurred.Whenanitemissoldor disposedof,thecostandrelatedaccumulateddepreciationoramortizationiseliminatedandtheresultinggainor loss,ifany,isrecordedintheconsolidatedstatementsofoperations.
Theestimatedusefullivesofthemajorclassesofpropertyandequipmentaregenerallyasfollows:
Useful Life(in Years)
Laboratory equipment 3 to 5
Computer hardware 3
Computer software 3
Furniture and fixtures 5
Leasehold improvements Lease Term
Leases
Leasesareclassifiedas operatingor financingatleaseinceptionand as necessaryatmodification.Leased assets represent the Company’s right to use an underlying asset for the lease term and lease liabilitiesrepresent itsobligationtomakeleasepaymentsarisingfromthelease.
Operatingleasesareincludedinoperatingleaseright-of-use(“ROU”) assetsand operatingleaseliabilities intheconsolidatedbalancesheets.OperatingleaseROUassetsandliabilitiesarerecognizedatthelease commencementdatebasedonthepresentvalueofleasepaymentsovertheleaseterm.Whenreadily determinable,theCompanyusestherateimplicitintheleasetodiscountleasepayments;however,whentherate isnotreadilydeterminable,theCompanyusestheincrementalborrowingratebasedontheinformationavailable atthecommencementdate.Theincrementalborrowingrateistherateofinterestthatacompanywouldhaveto pay to borrow an amount equal to the lease paymentson a collateralizedbasis over a similartermand in a similar economicenvironment. The operatingleaseROUassetalsoincludesanyinitialdirectcosts,leasepaymentsmadepriortolease commencement,andleaseincentivesreceived.Variableleasepaymentsareexpensedasincurredandarenot includedwithintheROUassetandleaseliabilitycalculation.Variableleasepaymentsprimarilyinclude reimbursementsofcostsincurredbylessorsforcommonareamaintenanceandutilities.
Foreachlease,thedeterminedleasetermisbasedonanoncancellableperiod,includinganyrent-free periodsprovidedbythelessor,andmayincludeoptionstoextendorterminatetheleasewhenitisreasonably certainthattheCompanywillexercisethatoption.Leasecostforleasepaymentsisrecognizedonastraight-line basisovertheleaseterm.Certainleaseagreementscontainleaseandnon-leasecomponents.The Company accountsfornon-leasecomponentsaspartoftheleasecomponenttowhichtheyrelate.
TheCompanydoesnotrecognizeROUassetsandleaseliabilitiesforshort-termleases,whichhavealease term of twelve months or less and do not include an option to purchase the underlying asset that the Company is reasonablycertainto exercise.
Goodwill and IntangibleAssets
IntangibleassetsidentifiedintheAcquisitionincludeGRAILtradenames,developedtechnology,and GRAILin-processresearchanddevelopment(“IPR&D”)andweremeasuredatfairvalueasoftheclosing date of Illumina’s acquisition of GRAIL (“ClosingDate”). Goodwillrepresentstheexcessofpurchasepricepaidcostoverfairvalueofthenetidentifiableassetsacquired.
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GRAIL, Inc.
NOTES TO CONSOLIDATEDFINANCIALSTATEMENTS
TheCompany’stradenames,GRAILandGalleri,havebrandrecognitioninthemarketrelatedtothe servicesGRAILprovidescustomersand the researchand developmentactivitiesGRAILperforms.GRAIL’s developedtechnologyincludesintangibleassetsrelatedtoGalleri, itsmulti-cancerearlydetectiontestthatwas launchedasalaboratory-developedtest(“LDT”)in2021,aswellasadiagnosticaidforcancer(“DAC”)test. The developedtechnologyunderpinsbothGalleri, designedasa cancerscreeningtestforasymptomatic individuals over 50 years of age, and DAC that is being designed to accelerate diagnostic resolution for patients for whom there is a clinical suspicion of cancer. The cost of identifiable intangible assets with finite lives, such as trade names and developed technology assets, are amortized on a straight-line basis over the assets’ respective estimated useful lives of 9 years and 18 years,respectively.
The Company’s IPR&D includesassets relatedto GRAIL’s developmentof a minimalresidualdisease (“MRD”)test,apost-diagnostictest,thatiscurrentlyunderdevelopment.IPR&Disconsideredindefinite-lived andthereforeisnotamortizeduntilcompletedandplacedintoservice,atwhichpointitwillbegintobe amortizedoveritsestimatedusefullifeorexpenseduponabandonmentoftheassociatedresearchand developmentefforts.
While goodwill and IPR&D are not amortized, they are reviewed for impairmentat least annually or more frequentlyif events or circumstancesindicate a potentialfor impairment.Goodwill and IPR&D are considered impairedifthecarryingvalueofthereportingunitorIPR&Dassetexceedsitsrespectivefairvalue.
The Company performs itsgoodwillimpairmentanalysisatthereportingunitlevel. The Company hasonereportingunit,which alignswith its reportingstructureandavailabilityofdiscretefinancialinformation.Duringthegoodwill impairmentreview, the Company assessesqualitativefactorstodeterminewhetheritismorelikelythannotthatthefairvalue of the Company’s reportingunitislessthanthecarryingamount,includinggoodwill. During the indefinite-lived intangible asset impairment review, the Company assesses the qualitative factors to determine whether it is more likely than not that the fair value of the indefinite-lived intangible asset fair value is less than the carrying amount. The qualitative factors considered include, but are not limited to, macroeconomic conditions, industry and market considerations, and our overall financial performance. If the Company determinesthatitisnotmore likelythannotthatthefairvalueofourreportingunit or the intangible assetislessthanthecarryingamount,noadditionalassessment isnecessary.Ifthecarryingamountofthereportingunit or intangible asset exceedsitsfairvalue, the Company recordsanimpairmentloss basedontheexcess. The Company mayelecttobypassthequalitativeassessmentinaperiodandproceedtoperformthe quantitativegoodwill and indefinite-lived intangible assetimpairmenttest.
ImpairmentofLong-LivedAssets
Long-livedassets,otherthangoodwillandIPR&D(asdescribedabove),areevaluatedforindicationsof possibleimpairmentwhenevereventsorchangesincircumstancesindicatethatthecarryingamountofanasset maynotberecoverable.Recoverabilityismeasuredbycomparisonofthecarryingamountstothefuture undiscountedcashflowsattributabletotheseassets.Shouldimpairmentexist,theimpairmentwouldbemeasured astheamountbywhichthecarryingamountoftheassetsexceedsthefairvalueofthoseassets.
Segments
The Company operatesand managesits businessas one reportableoperatingsegmentwhich provides multi-cancerearlydetectiontestingandservices.The chiefoperatingdecisionmakerreviewsfinancial informationonanaggregatebasisforthepurposesofevaluatingfinancialperformanceandallocatingthe companyresources.SubstantiallyalloftheCompany’slong-livedassetsarelocatedintheUnitedStates.
RevenueRecognition
RevenueisaccountedforinaccordancewithTopic606,whichprovidesforafive-stepmodelthatincludes identifyingthe contractwith a customer,identifyingthe performanceobligationsin the contract,determiningthe transactionprice,allocatingthetransactionpriceto theperformanceobligations,and recognizingrevenuewhen, oras,anentitysatisfiesaperformanceobligation.Revenuesarederivedfromscreeninganddevelopment services.The Company’s revenueswere primarilygeneratedin the United States.
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GRAIL, Inc.
NOTES TO CONSOLIDATEDFINANCIALSTATEMENTS
ScreeningRevenue
TheCompanyrecognizesscreeningrevenuefromthesaleofcancerscreeningtestingservicesforpatients. Patientsobtaintestsviatheiremployers,healthcaresystems,payors,conciergemedicinepractices,lifeinsurance providersordirectlyviatelemedicine.Patientsreceivethemulti-cancerearlydetectionkitaftertheorderisplaced andcompletetheblooddraw.ThespecimenisthensenttotheCompany’slab,thetestisprocessed,andtheresultis electronicallydeliveredtothepatients’physician.Thetestpriceisbasedonthenegotiatedcontractualratewiththe Company’sdirectcustomers,otherwisetheCompany’sstandardlistpriceapplies.TheCompanyidentifieseach saleofitstesttoacustomerasasingleperformanceobligation;therefore,revenueisrecognizedatthepointoftime whenthetestresultreportisdelivered.Invoicesaregenerallyduewithin30daysofreceipt.
For self-paypatients,theCompanyhas concludedthatan impliedcontractexists,however thetransaction pricefortheimpliedcontractrepresentsvariableconsiderationas therearesituationsin which theCompany is notexpectedtocollectthefullinvoicedamountsfromself-paypatientsdue topriceconcessions.The Company utilizestheexpectedvalueapproachtoestimatethetransactionpriceandappliesaconstraintforsuchvariable consideration,on a portfoliobasis. The Company monitorsthe estimatedamountsto be collectedat each reportingperiodbasedonactualcashcollectionsinordertoassesswhetherarevisiontotheestimateisrequired. Both the estimateand any subsequentrevisioncontain uncertaintyand requirethe use of significantjudgmentin theestimationofthevariableconsiderationandapplicationoftheconstraintforsuchvariableconsideration.The Companyanalyzesitsactualcashcollectionsovertheexpectedcollectionperiodandcomparesitwiththe estimatedvariableconsiderationforeachportfolioand any differenceisrecognizedas an adjustmentto estimated revenueaftertheexpectedcollectionperiod,subjecttoassessmentoftheriskoffuturerevenuereversal.
DevelopmentServicesRevenue
Developmentservicesrevenueincludesdevelopmentactivitiesperformedin partnershipwith biopharmaceuticalcompanies.The Company’stargetedmethylation-basedtechnologyenablesdevelopmentof productsandservicestooptimizetreatmentonceacancerhasbeendiagnosed.Biopharmaceuticalpartners engagetheCompanytorunpilotsandresearchstudiestoevaluateandlearnaboutthetechnology’sapplication. The Company evaluatesthetermsand conditionsincludedwithinitsdevelopmentservicescontractswith biopharmaceuticalcustomersto ensureappropriaterevenuerecognition,includingwhetherservicesare considereddistinctperformanceobligations.The Company firstidentifiesmaterialpromisesunderthecontract andthenevaluateswhetherthesepromisesarecapableofbeingdistinctwithinthecontextofthecontract.In assessingwhetherapromisedserviceiscapableofbeingdistinct,theCompanyconsiderswhetherthecustomer couldbenefitfromtheserviceeitheron itsown or togetherwith otherresourcesthatarereadilyavailableto the customer,includingfactorssuch as theresearch,development,and commercializationcapabilitiesof a thirdparty aswellastheavailabilityoftheassociatedexpertiseinthegeneralmarketplace.Forcontractswithmultiple performanceobligations,thetransactionpriceisallocatedtotheseparateperformanceobligationsonarelative standalonesellingpricebasis.The Company determinesthestandalonesellingpriceby consideringthehistorical sellingpriceoftheseperformanceobligationsinsimilartransactionsaswellasotherfactors,including,butnot limitedto,thepricethatcustomersinthemarketwouldbewillingtopay,competitivepricingofothervendors, industrypublicationsand currentpricingpractices,and expectedcostsof satisfyingeachperformanceobligation plusappropriatemargin;orbyusingtheresidualapproachifstandalonesellingpriceisnotobservable,by referencetothetotaltransactionpricelessthesumoftheobservablestandalonesellingpricesofother performanceobligationspromisedin thecontract.
BiopharmaceuticalpartnersengagetheCompanytorunpilotandresearchstudiesbysendingpatient samplesand comparingtheCompany’stestresultto theirexpectedresultforevaluationof performanceand application.The Company recognizesrevenueas performanceobligationsarecompleted.
Followingfavorableresultsfrompilotand researchstudies,biopharmaceuticalpartnersand theCompany mayenterintodevelopmentserviceagreementsrelatedto clinicaltrialand companiondiagnosticdevice developmentand regulatorysubmissionsforthedevelopedproduct(s).These agreementstypicallyhave multiple commitmentsof servicesand thereforehave longer performanceperiods. The Company uses an input method basedoncostsincurredtomeasureitsprogresstowardthecompletionandsatisfactionoftheperformance
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obligations.TheCompanyassessesthechangestothetotalexpectedcostestimatesaswellasanyincremental feesnegotiatedresultingfromchangestothescopeoftheoriginalcontractindeterminingtherevenuerecognized ateachreportingperiod.Invoicesaregenerallyduewithin60days.
DeferredRevenue
Deferredrevenue,whichisacontractliability,consistsprimarilyofpaymentsreceivedinadvanceof revenuerecognitionfromcontractswith customers.For example,prepaymentsreceivedfrompatientsfor screeningtestingservicesand developmentservicesand othercontractswith biopharmaceuticalcustomersoften containupfrontpaymentswhichresultsintherecordingofdeferredrevenuetotheextentcashisreceivedpriorto theCompany’sperformanceof therelateddevelopmentservices.Contractliabilitiesarerelievedas theCompany performsitsobligationsunderthecontractandrevenueisrecognized.Deferredrevenue was $1.6 million and $0.8 million as of December 31, 2024 and December 31, 2023, respectively, all of which is considered short-term and was recorded within other current liabilities on the accompanying consolidated balance sheets.
Cost of ScreeningRevenue
Costofscreeningrevenuegenerallyconsistsofcostofmaterials, labor including salaries and wages, bonus, benefits and stock-based compensation,amortizationof GRAILintangibleassets,blood collection kits and shipping, phlebotomy, royalties, electronic medical records, equipment depreciation, and allocations of overhead expenses such as facilities and information technology costs.Per the terms of the Separation and Distribution Agreement with Illumina, the royalty arrangement with Illumina is suspended until the earlier of December 24, 2026 or any change of control of the Company, at which time a high-single digit royalty payments will be payable.
Cost of Development ServicesRevenue
Cost of developmentservicesrevenuegenerallyconsistsof materials and patient sample acquisition, labor including salaries and wages, bonus, benefits and stock-based compensation, royalties, equipment depreciation, and allocations of overhead expenses such as facilities and information technology costs. Per the terms of the Separation and Distribution Agreement with Illumina, the royalty arrangement with Illumina is suspended until the earlier of December 24, 2026 or any change of control of the Company, at which time a high-single digit royalty payments will be payable.
Accrued ClinicalStudiesand Research and Development Expenses
Estimatesofunbilledcostsofresearchanddevelopmentactivitiesforclinicalstudiesconductedbythird- partyserviceprovidersareaccrued.Theestimatedcostsofresearchanddevelopmentactivitiesarerecorded basedupontheestimatedamountofservicesprovided.Thesecostsareincludedinaccruedliabilitiesintheconsolidatedbalancesheetsandwithinresearchanddevelopmentexpensesintheconsolidatedstatementsofoperations.Thesecostsarea significantcomponentof researchand developmentexpenses.The costsareaccruedbasedon factorssuch as estimatesof the work completedand in accordancewith agreementsestablishedwith third-partyservice providers.The judgmentsand estimatesin determiningtheaccruedliabilitiesbalanceareassessedin each reportingperiod.
Research and Development
Researchanddevelopmentexpensesincludecostsincurred todeveloptheCompany’stechnology(priortoestablishingtechnologicalfeasibility),collectclinicalsamples, andconductclinicalstudiestodevelopandsupporttheCompany’smulti-cancertests.Thesecostsconsistof personnelcosts,includingsalaries,benefits,and stock-basedcompensationexpenseassociatedwith theresearch and developmentpersonnel,laboratorysupplies,consultingcosts,costsassociatedwith settingup and conducting clinicalstudiesatdomesticand internationalsites,and allocatedoverheadexpensesincludingrent,information technology,and equipmentdepreciation.Both internaland externalresearchand developmentcosts are expensed intheperiodsinwhichtheyareincurred.Nonrefundableadvancepaymentsforgoods and servicesthat willbeusedorrenderedinfutureresearchand
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developmentactivitiesaredeferredandrecognizedasexpensein theperiodinwhichtherelatedgoodsaredelivered,orservicesareperformed.
AdvertisingCosts
Advertisingcostsareexpensedas incurred.Advertisingcostswere $17.7 million,$21.9 million and $24.5 million for the years ended December 31, 2024, December 31, 2023, and January 1, 2023, respectively.
Stock-BasedCompensationExpense
The Company’s stock-based compensation expense includes expenses related to Cash-Based Equity Awards, restricted stock units (“RSUs”), deferred stock units (“DSUs”), and performance stock options. Forfeitures are accounted for as incurred, as a reversal of stock-based compensation expense related to awards that will not vest.
A cash-based equity incentive award (the “Cash-Based Equity Award”) program was adopted following Illumina’s acquisition of GRAIL in 2021 to provide GRAIL employees with dollar-denominated long-term incentive awards that were indexed to the value of GRAIL. In connection with the Spin-Off, in accordance with the Employee Matters Agreement, the Cash-Based Equity Awards, which were cash-settled, liability-classified awards, were modified to become RSUs that will be settled in shares of the Company’s common stock upon vesting (the “Award Modification”). Unvested performance stock options that were previously held by certain GRAIL employees to purchase Illumina common stock were converted to options to purchase GRAIL common stock in connection with the Spin-Off. See Note 7 — Stock-Based Compensation for further details of the Award Modification.
Prior to the Award Modification, the Cash-Based Equity Awards were liability-classified awards because the Cash-Based Equity Awards could be (and were) settled in cash. Until April 30, 2024, GRAIL’s stand-alone value calculation was estimated by the Company based on its analysis and the input from independent valuation advisors. The value of the Cash-Based Equity Awards was recorded over the applicable vesting periods, with recognition of a corresponding liability recorded in incentive plan liabilities in the consolidated balance sheets. The Cash-Based Equity Awards were remeasured at each reporting date until settlement with changes in fair value recognized in stock-based compensation expense. On April 30, 2024, Illumina’s Compensation Committee approved an adjustment of the ordinary course payouts of the Cash-Based Equity Awards providing that the Cash-Based Equity Awards would be paid based on their nominal (face) value without adjustment based on changes in equity value. Subsequent to this adjustment to the Cash-Based Equity Awards and continuing until the Award Modification, the Cash-Based Equity Awards were expensed in accordance with their applicable vesting schedules.
In connection with the Acquisition, Illumina issued equity awards to GRAIL employees in exchange for their remaining outstanding and unvested GRAIL equity awards (the “Replacement Awards”). The awards consisted of restricted stock units and performance stock options that settled in shares of Illumina common stock at vesting or exercise, as applicable. The compensation expense for the Replacement Awards was recognized based on the fair value on a straight-line basis over the requisite service periods of the awards.
The grant date fair values of RSUs and DSUs are generally determined based on the closing market price of GRAIL’s common stock on the date of the grant, but (i) in the case of RSUs resulting from the Award Modification, the date of the Award Modification, and (ii) in the case of DSUs resulting from deferrals of director cash fees, based on the closing market price of GRAIL’s common stock on the date that such cash fees would have been otherwise paid. Stock-based compensation expense is recognized based on the fair value of the award on a straight-line basis over the requisite service periods of the RSUs.
The fair value of performance stock options with service conditions is determined using the Black-Scholes-Merton option-pricing model. The model assumptions include expected volatility, term, dividends, and the risk-free interest rate. The expected volatility is generally determined by weighting the historical and implied volatility of peer companies’ common stock. The expected term is the Company’s best estimates based on the vesting period and contractual term. Given that cash dividends were never declared or paid on the Illumina nor GRAIL common
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stock, the expected dividend yield is determined to be 0%. The Company does not anticipate paying cash dividends in the foreseeable future. The risk-free interest rate is based upon U.S. Treasury securities with remaining terms similar to the expected term of the stock-based awards. The fair value of the performance stock options begins to be recognized when it is probable that the performance-based condition will be met.
DefinedContributionPlan
The Company sponsors a defined contribution plan under Section401(k) of the Internal Revenue Code (the“401(k)Plan”) pursuant to which, eligible employees can elect to contribute eligible compensation to the 401(k) Plan, subject to certain limitations. On January 1, 2023, the 401K Plan was modified to provide for a 100% employer match of employee contributions up to a maximum of three thousand dollars per employee. For the years ended December 31, 2024 and December 31, 2023, the Company contributed $3.9 million and $3.9 million to match employee contributions, respectively. The Company pays the administrative costs for the 401(k) plan.
Provisionfor(Benefitfrom)IncomeTaxes
As a standalone entity, the Company files tax returns on its own behalf, and tax balances and the effective income tax rate may differ from the amounts reported in historical periods. As of June 24, 2024 and in connection with the Spin-Off, the Company adjusted its deferred tax balances and computed its related tax provision to reflect operations as a standalone entity. During the period that Illumina held the Company, the Company’s activity generated various tax attributes recognized as deferred tax assets (“DTAs”), due primarily to the generation of net operating losses (“NOLs”), IRC 174 capitalized research and experimental expenditures, and research and development (“R&D”) tax credits that could not be specifically utilized by the Company as it did not generate positive taxable income and it was not a separately regarded tax paying entity from Illumina. Since the Company was not a separately regarded taxable entity from Illumina, these tax attributes were either utilized by or will be utilized by Illumina when filing its consolidated tax return. Historically, the tax attributes were only presented in the Company’s standalone financial statements to allow the users to understand the financial position of the Company as a standalone taxable entity under the Separate-Return Method. The total tax-effected value of the tax attributes, net of Financial Accounting Standards Board Interpretation No. 48 (“FIN48”) liabilities and valuation allowance that were deemed to be the property of Illumina, was $447.2 million. In connection with the Spin-off, the underlying $447.2 million of tax attributes were adjusted through an entry of $447.2 million to additional paid in capital.
Net Loss Per Share Attributable to Common Stockholders
The Company calculates basic net loss per share attributable to common stockholders by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding for the period. Diluted net loss per share is computed based on the sum of the weighted average number of common shares and potentially dilutive common shares outstanding during the period. In loss periods, basic and diluted net loss per share are identical since the effect of potentially dilutive common shares is antidilutive and therefore excluded. Potentially dilutive common shares consist of shares issuable under equity awards. Potentially dilutive common shares from equity awards are determined using the average share price for each period under the treasury stock method. In addition, proceeds from exercise of equity awards and the average amount of unrecognized compensation expense for equity awards are assumed to be used to repurchase shares.
Restructuring Charges
Restructuring charges consist primarily of severance, benefits, payroll taxes, and other related costs. The Company evaluates the nature of these costs to determine if they relate to ongoing benefit arrangements which are accounted for under ASC 712, Compensation - Nonretirement Postemployment Benefits, or one-time benefit arrangements which are accounted for under ASC 420, Exit or Disposal Cost Obligations. The Company records a liability for ongoing employee termination benefits when it is probable that an employee is entitled to them and the amount of the benefits can be reasonably estimated. One-time employee termination costs are recognized
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when management has communicated the termination plan to employees, unless future service is required, in which case the costs are recognized ratably over the future service period. All other related costs are recognized when incurred. Restructuring charges are recognized as an operating expense within the consolidated statements of operations and are classified based on each employee’s respective function.
ForeignCurrency
The functionalcurrencyof the foreignsubsidiary istheBritishPound. Adjustmentsresultingfrom translatingthe financialstatementsof the United Kingdom subsidiaryintoU.S.Dollarsarerecordedasacomponentofothercomprehensivelossintheconsolidated statementsofcomprehensiveloss.Monetaryassetsandliabilitiesdenominatedinaforeigncurrencyare translatedintoU.S.Dollarsattheexchangerateonthebalancesheetdate.Revenuesandexpensesaretranslated attheweighted-averageexchangeratesduringtheperiod.Equitytransactionsaretranslatedusinghistorical exchangerates.Gainsandlossesresultingfromtranslationofforeigncurrencymonetarytransactionsare reportedinotherincome(expense),netintheconsolidatedstatementsofoperationsandcomprehensiveloss. Gainsandlossesresultingfromforeigncurrencytransactionsthataredeemedtobeofalong-terminvestment naturearereportedasaseparatecomponentofothercomprehensiveloss.
Reclassification
Certain amounts on the consolidated balance sheets, consolidated statements of operations and statements of cash flows have been conformed to the December 31, 2024 presentation of related party balances and transactions.
Recent Accounting Pronouncements
The Company evaluates all Accounting Standards Updates (“ASUs”) issued by the Financial Accounting Standards Board (the "FASB") for consideration of their applicability. ASUs not included in the disclosures in this report were assessed and determined to be either not applicable or are not expected to have a material impact on the Company’s consolidated financial statements.
Recently Adopted Accounting Pronouncements
In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. This update improves reportable segment disclosure requirements, primarily through enhanced disclosures of significant segment expenses. This standard was effective for the Company beginning in fiscal year 2024 and interim periods within fiscal year 2025. We adopted the standard on its effective date in fiscal year 2024 and applied the amendments retrospectively to all prior periods presented in the consolidated financial statements. The Company has included the required disclosures in “Note 14 — Segment Information.”
Accounting Pronouncements Not Yet Adopted
In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvement to Income Tax Disclosures. This update improves income tax disclosure requirements, primarily through enhanced transparency and decision usefulness of disclosures. This guidance will be effective for annual reporting periods beginning the year ended December 31, 2025, with early adoption permitted and can be applied on either a prospective or retroactive basis. The Company is currently evaluating the potential impact of this guidance on its consolidated financial statements and related disclosures.
In November 2024, the FASB issued ASU No. 2024-03, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures. This update intends to improve financial reporting by requiring disclosure of additional information about specific expense categories. This guidance is effective for annual reporting periods beginning after December 15, 2026 and interim reporting periods beginning after December 15, 2027. Early adoption is permitted and the guidance is to be applied prospectively and may be applied
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NOTES TO CONSOLIDATEDFINANCIALSTATEMENTS
retrospectively. The Company is currently evaluating the impact of this guidance on our consolidated financial statements and related disclosures.
NOTE 3. REVENUE
The following table presents the Company’s revenue disaggregated by geographic areas based on the customers’ locations:
Year Ended
United States
International(1)
Screening 91 — —
_________
(1) International region includes revenue earned from customers located outside of the United States.
The following table presents the Company’s revenue disaggregated by revenue source:
Year Ended
Screening
Government(1) 160 — —
Development Services
_________
(1) Government screening revenue primarily consists of revenue earned as part of our Galleri-Medicare clinical study.
NOTE 4.GOODWILL AND INTANGIBLE ASSETS
Due to the application of pushdown accounting, the Company’s balance sheet includes goodwill and intangible assets recognized by Illumina in connection with Illumina’s acquisition of the Company.
Goodwill Impairment
Goodwill represents the excess of purchase price Illumina paid over the fair value of the net identifiable assets acquired upon the Acquisition of the Company.
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NOTES TO CONSOLIDATEDFINANCIALSTATEMENTS
(in thousands) Goodwill
Balance as of December 31, 2024 —
2024 Goodwill Impairment
In Q2 2024, prior to the Spin-Off, the approval of the Spin-Off by Illumina’s board of directors represented a potential indicator of impairment, which also aligned with the timing of Illumina’s annual goodwill impairment test date for 2024. Theassessmentwasperformedusinga marketapproachtodeterminethefairvalueofgoodwill whichutilized the valuation ranges prepared by the divestment financial advisors engaged by Illumina in connection with the Spin-Off. The valuation ranges were determined using revenue multiples from public company peers for 2024 and 2025. The implied discount rateforthegoodwillimpairmentassessmentwas51.5%.Theseestimatesandassumptions representaLevel3measurementbecausetheyincludeunobservableinputsthataresupportedbylittleorno marketactivityandreflectCompany-determinedandjudgmentalfactorsfortheseassumptionsinmeasuringfairvalue.The assumptionsin theassessmentof an impairmentanalysisareinherentlysubjectivedue to uncertaintyand any slightchanges in these ratesand assumptionscould have a significantimpacton the concludedvalueofgoodwill. The Company recognizeda goodwill impairmentof $888.9 millionas a resultof the impairment assessment,primarilyduetochangesto the forecast of GRAIL’s value and the method for valuing GRAIL.
2023 Goodwill Impairment
In Q3 2023, Illumina concludedthesustaineddecreasein Illumina’sstockpriceand overallmarketcapitalization duringthequarterwasatriggeringeventindicatingthefairvalueofGRAILmightbelessthanitscarrying amountwhichled the Company totestgoodwillforimpairment.Theassessmentwasperformedusingacombinationofboth anincomeandamarketapproachtodeterminethefairvalueofgoodwill.Theincomeapproachutilized estimateddiscountedcashflows,whilethemarketapproachutilizedcomparablecompanyinformation.Estimates andassumptionsusedintheincomeapproachincludedprojectedcashflowsandadiscountrate.Thediscount rateselectedatthetimeofthegoodwillimpairmentassessmentwas24.0%.Theseestimatesandassumptions representaLevel3measurementbecausetheyincludeunobservableinputsthataresupportedbylittleorno marketactivityandreflectCompany-determinedandjudgmentalfactorsfortheseassumptionsinmeasuringfairvalue.The assumptionsin theassessmentof an impairmentanalysisareinherentlysubjectivedue to uncertaintyand any slightchanges in these ratesand assumptionscould have a significantimpacton the concludedvalueofgoodwill. The Company recognizeda goodwill impairmentof $608.5 millionas a resultof the impairment assessment,primarilyduetochangestoexpectedtimingofrevenueandahigherdiscountrateselectedforthe fairvaluecalculationofGRAIL.
2022 Goodwill Impairment
On July 13, 2022, the European General Court ruled that the European Commission had jurisdiction under the European Union Merger Regulation to review the Acquisition. Additionally, on September 6, 2022, the European Commission issued a decision prohibiting the Acquisition. These decisions constituted substantive changes in circumstances and led Illumina to test goodwill for impairment. The assessment was performed using a combination of both an income and a market approach to determine the fair value of goodwill. The income approach utilized the estimated discounted cash flows, while the market approach utilized comparable company information. Estimates and assumptions used in the income approach included projected cash flows and a discount rate. The discount rate selected at the time of the goodwill impairment assessment was 22.0%. These estimates and assumptions represent a Level 3 measurement because they include unobservable inputs that are
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supported by little or no market activity and reflect Company-determined and judgmental factors for these assumptions in measuring a fair value. The assumptions in the assessment of an impairment analysis are inherently subjective due to uncertainty and any slight changes in these rates and assumptions could have a significant impact on the concluded value of goodwill. The Company recognized a goodwill impairment of $4.7 billion as a result of the impairment assessment, primarily due to the negative impact of capital market conditions and a higher discount rate selected for the fair value calculation of GRAIL.
IntangibleAssets
IntangibleassetsrecognizedaspartoftheAcquisitionincludedevelopedtechnologies,tradenameand IPR&DthatweremeasuredatfairvalueasoftheClosingDate.Thefollowingroll-forwardindicatesthefair valuesassignedtoidentifiableassetsfromtheAcquisitionandtheresultingamortizationandimpairment:
Thefairvaluesofthedevelopedtechnologies,tradenameandIPR&Dwereestimatedusinganincome approach,underwhichanintangibleasset’sfairvalueisequaltothepresentvalueoffutureeconomicbenefitsto bederivedfromownershipoftheasset.The estimatedfairvaluesweredevelopedby discountingfuturenetcash flowstotheirpresentvalueatmarket-basedratesofreturnand inclusiveofan assumptionfortechnology obsolescence.The usefullivesoftheintangibleassetsforamortizationpurposesweredeterminedby considering theperiodofexpectedcashflowsusedtomeasurethefairvaluesoftheintangibleassets,adjustedasappropriate forentity-specificfactorsincludinglegal,regulatory,contractual,competitive,economic,and otherfactorsthat maylimittheusefullife.Thedevelopedtechnologyandtradenameassetsareamortizedonastraight-linebasis overtheirestimatedusefullives.