INVITAE CORP – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations
should be read in conjunction with our condensed consolidated financial
statements and the related notes and other financial information included in
Part I, Item 1. of this Form 10-Q, and together with our audited consolidated
financial statements and the related notes and other information included in our
Annual Report on Form 10-K for the year ended December 31, 2021. Historic
results are not necessarily indicative of future results.

This report contains forward­looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. All statements in this report
other than statements of historical fact, including statements identified by
words such as "believe," "may," "will," "estimate," "continue," "anticipate,"
"intend," "expect" and similar expressions, are forward­looking statements.
Forward­looking statements include, but are not limited to, statements about:

•our views regarding the future of genetic testing and its role in mainstream
medical practice;

•the impact of the COVID-19 pandemic on our business and the actions we have
taken or may take in response thereto;

•our mission and strategy for our business, products and technology;

•the implementation of our business model and our success entering new markets;

•the expected benefits from and our ability to integrate our acquisitions;

•our ability to obtain regulatory approvals for our tests;

•the rate and degree of market acceptance of our tests and genetic testing
generally;

•our ability to scale our infrastructure and operations in a cost­effective
manner;

•our expectations regarding our platform and future offerings;

•the timing and results of studies with respect to our tests;

•developments and expectations relating to our competitors and our industry;

•our competitive strengths;

•the degree to which individuals will share genetic information generally, as
well as share any related potential economic opportunities with us;

•our commercial plans, including our sales and marketing expectations as well as
our ability to expand internationally;

•our ability to obtain and maintain adequate reimbursement for our tests;

•regulatory, political and other developments in the United States and foreign
countries;

•our ability to attract and retain key scientific, sales, engineering or
management personnel;

•our expectations regarding our ability to obtain and maintain intellectual
property protection and not infringe on the rights of others;

•the effects of litigation or investigations on our business;

•our ability to obtain funding for our operations and the growth of our
business, including potential acquisitions;

•our future financial performance;

•our beliefs regarding our future growth and the drivers of such growth;

•our expectations regarding environmental, social and governance matters;

•the impact of accounting pronouncements and our critical accounting policies,
judgments, estimates and assumptions on our financial results;

•our expectations regarding our future revenue, cost of revenue, operating
expenses and capital expenditures, and our future capital requirements; and

•the impact of tax laws on our business.

Forward­looking statements are subject to a number of risks and uncertainties
that could cause actual results to differ materially from those expected. These
risks and uncertainties include, but are not limited to, those risks discussed
in Part II, Item 1A. "Risk Factors" in this Quarterly Report on Form 10-Q.
Although we believe that the expectations and assumptions reflected in the
forward­looking statements are reasonable, we cannot guarantee future results,
level of activity, performance or achievements. Any forward­looking statements
in this report speak

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only as of the date of this report. We expressly disclaim any obligation or
undertaking to update any forward­looking statements.

In this report, all references to "Invitae," "we," "us," "our," or "the Company"
mean Invitae Corporation.

Invitae and the Invitae logo are trademarks of Invitae Corporation. AMP™,
LiquidPlex™, VariantPlex® and FusionPlex®, are the property of ArcherDX, LLC, a
wholly-owned subsidiary of Invitae Corporation. We also refer to trademarks of
other companies and organizations in this report.

Summary of risk factors

Our business is subject to numerous risks and uncertainties that could affect
our ability to successfully implement our business strategy and affect our
financial results. You should carefully consider all of the information in this
Quarterly Report and, in particular, the following principal risks and all of
the other specific factors described in Part II, Item 1A. "Risk Factors" in this
Quarterly Report on Form 10-Q before deciding whether to invest in our company.

•We expect to continue incurring significant losses, and we may not successfully
execute our plan to achieve or sustain profitability.

•Our inability to raise additional capital on acceptable terms in the future may
limit our ability to develop and commercialize new tests and expand our
operations.

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

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

•We need to scale our infrastructure in advance of demand for our tests and
other products and services, and our failure to generate sufficient demand for
our products and services would have a negative impact on our business and our
ability to attain profitability.

•We face risks related to health epidemics, including the ongoing COVID-19
pandemic, which could have a material adverse effect on our business and results
of operations.

•If third-party payers, including managed care organizations, private health
insurers and government health plans, do not provide adequate reimbursement for
our tests or we are unable to comply with their requirements for reimbursement,
our commercial success could be negatively affected.

•We face intense competition, which is likely to intensify further as existing
competitors devote additional resources to, and new participants enter, the
markets in which we operate. If we cannot compete successfully, we may be unable
to increase our revenue or achieve and sustain profitability.

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

•The market for patient data software is competitive, and our business will be
adversely affected if we are unable to successfully compete.

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

•If we are not able to continue to generate substantial demand of our tests, our
commercial success will be negatively affected.

•If our therapy selection IVDs and PCM products and related services do not
perform as expected, we may not realize the expected benefits of our acquisition
of ArcherDX.

•The future growth of our distributed products business is partially dependent
upon regulatory approval and market acceptance of our IVD products.

•Our success will depend on our ability to use rapidly changing genetic data to
interpret test results accurately and consistently, and our failure to do so
would have an adverse effect on our operating results and business, harm our
reputation and could result in substantial liabilities that exceed our
resources.

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•If the FDA regulates the tests we currently offer as LDTs as medical devices,
we could incur substantial costs and our business, financial condition and
results of operations could be adversely affected.

•If we are unable to transition to the new European Union IVDR, we could lose
the ability to serve the European Union market.

•We may not be able to obtain regulatory clearance or approval of our IVD
products, or even if approved, such products may not be approved for guideline
inclusion, which could adversely affect our ability to realize the intended
benefits of our acquisition of ArcherDX.

•One of our competitors has alleged that our Anchored Multiplex PCR, or AMP,
chemistry and products using AMP are infringing on its intellectual property,
and we may be required to redesign the technology, obtain a license, cease using
the AMP chemistry altogether and/or pay significant damages, among other
consequences, any of which would have a material adverse effect on our business
as well as our financial condition and results of operations, and the intended
benefits of our acquisition of ArcherDX.

•We have a large amount of debt, servicing our debt requires a significant
amount of cash, and our debt service obligations may prevent us from taking
actions that we would otherwise consider to be in our best interests.

Mission and strategy

Invitae's mission is to bring comprehensive genetic information into mainstream
medical practice to improve the quality of healthcare for billions of people.
Our goal is to aggregate a majority of the world's genetic information into a
comprehensive network that enables sharing of data among network participants to
improve healthcare and clinical outcomes.

We were founded on four core principles:

•Patients should own and control their own genetic information;

•Healthcare professionals are fundamental in ordering and interpreting genetic
information;

•Driving down the price of genetic information will increase its clinical and
personal utility; and

•Genetic information is more valuable when shared.

Our strategy for long-term growth centers on five key drivers of our business,
which we believe work in conjunction to create a flywheel effect extending our
leadership position in the new market we are building:

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•Expanding our content offering. We intend to continue steadily adding
additional testing and analysis content to the Invitae platform, ultimately
leading to affordable and ongoing access to the molecular information that
enables personalized medicine. The breadth and depth of our offering is a core
and central contribution to an improved user experience.

•Creating a unique user experience. A state-of-the-art interactive platform will
enhance our service offering, leverage the uniquely empowering characteristics
of online sharing of genetic information and, we believe, enable a superior
economic offering to clients. We intend to continue to expend substantial
efforts developing, acquiring and implementing technology-driven improvements to
our customers' experience. We believe that an enhanced user experience and the
resulting benefits to our brand and reputation will help draw customers to us
over and above our direct efforts to do so.

•Driving volume. We intend to increase our brand equity and visibility through a
commitment to precision testing results, excellent service and a variety of
marketing and promotional techniques, including scientific publications and
presentations, sales, marketing, public relations, social media and web
technology vehicles. We believe that rapidly increasing the number of customers
using our platform helps us to attract partners.

•Attracting partners. As we add more customers to our platform, we believe our
business becomes particularly attractive to potential partners that can help the
patients in our network further benefit from their genetic information or that
provide us access to new customers who may wish to join our network. We believe
the cumulative effect of the increased volume brought by these strategic
components will allow us to lower the cost of our service and expand patient
access globally.

•Lowering the cost and price of genetic information. Our goal is to provide
customers with a broad menu of genetic content at a reasonable price and rapid
turn-around times in order to grow volume and, in turn, achieve greater
economies of scale. As our customers and our business benefit from further cost
savings, we expect that those cost savings will allow us to deliver still more
comprehensive information at decreasing prices and further improve the customer
experience, allowing us to reap the cumulative benefits from all of the efforts
outlined above.

We seek to differentiate our service in the market by establishing an
exceptional experience for our customers. To that end, we believe that elevating
the needs of the customer over those of our other stakeholders is essential to
our success. Thus, in our decision-making processes, we strive to prioritize, in
order:

•The needs of our customers;

•Motivating our employees to serve our customers; and

•Our long-term stockholder value.

We are certain that focusing on customers as our top priority rather than
short-term financial goals is the best way to build and operate an organization
for maximum long-term value creation.

Business overview

We are focused on making comprehensive, high-quality genetic information more
accessible and instrumental to the healthcare ecosystem and stakeholders,
including patients, providers and physicians, payers, pharmaceutical partners
and more. Our comprehensive and convenient physical and digital platform of risk
assessment and the resulting data that is actionable and guided is designed to
power healthcare decisions across our stakeholders, importantly providing
patients a lifetime partner in Invitae to best guide and manage their personal
and familial health decisions. We offer genetic testing across multiple clinical
areas, including hereditary cancer, cardiology, neurology, pediatrics,
personalized oncology, metabolic conditions and rare diseases. Medical genetics
is central to health outcomes and we are bringing it to the mainstream by
lowering the costs and removing barriers to adoption, which is driven by our
user-friendly and comprehensive Invitae Digital Health Platform. Ultimately, the
utility of the accumulated data will compound, enabling improved individual and
population health and advancing the benefits of molecular medicine around the
globe.

We have experienced rapid growth. For the years ended December 31, 2021, 2020
and 2019, our revenue was $460.4 million, $279.6 million, and $216.8 million,
respectively, and we incurred net losses of $379.0 million, $602.2 million, and
$242.0 million, respectively. For the three months ended March 31, 2022 and
2021, our revenue was $123.7 million and $103.6 million, respectively, and we
recognized net losses of $181.9 million and $109.5 million, respectively. At
March 31, 2022, our accumulated deficit was $1.9 billion. To meet the demands of
scaling our business, we increased our number of employees to approximately
2,900 at March 31, 2022 from approximately 2,300 on March 31, 2021. Our sales
force grew to 380 employees at March 31, 2022 from 300 at March 31, 2021.

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Sales of our tests have grown significantly. In 2021, 2020 and 2019, we
generated 1,169,000, 659,000 and 469,000 billable units, respectively. In the
three months ended March 31, 2022, we generated 322,000 billable units compared
to 259,000 billable units in the same period in 2021. We calculate volume using
billable units, which are billable events that include individual test reports
released and individual reactions shipped. We refer to the set of reagents
needed to perform a next generation sequencing ("NGS") test as a "reaction."
Approximately 57% of the billable volume generated in the first three months of
2022 were billable to patients, biopharmaceutical partners and other
business-to-business customers (e.g., hospitals, clinics, medical centers), and
the remainder were billable to government and private insurance payers. Many of
the gene tests on our assays are reimbursable by health insurance companies.
However, when we do not have reimbursement policies or contracts with private
insurers, our claims for reimbursement may be denied upon submission, and we
must appeal the claims. The appeals process is time consuming and expensive, and
may not result in payment. Even if we are successful in achieving reimbursement,
we may be paid at lower rates than if we were under contract with the
third-party payer. When there is not a contracted rate for reimbursement, there
is typically a greater payment requirement from the patient that may result in
further delay in payment for these tests.

We expect to incur operating losses for the near term as we continue to invest
in our business to achieve our revenue growth objectives, including expansion of
our platform to capture the broad potential of genetics across healthcare and
expansion into new laboratory and production facilities, and expect we will need
to raise additional capital in order to fund our operations. If we are unable to
achieve these objectives and successfully manage our costs, we may not be able
to achieve profitability in the near term or at all.

We believe that the keys to our future growth will be to increase billable
volume, achieve broad reimbursement coverage for our tests from third-party
payers and increase the amount we receive from other types of payers, advance
digital health solutions and data services, drive down the price for genetic
analysis and interpretation, reduce the costs associated with performing our
genetic tests, steadily increase the amount of genetic content we offer and is
used by providers across the range of healthcare platforms, consistently improve
the client experience, drive physician and patient utilization of our platform
for ordering and delivery of results and increase the number of strategic
partners working with us to add value for our clients. We also believe that
providing a unique genetic testing platform that is agnostic to stage of life or
disease category will deliver unique benefits to customers, payers and other
institutions that are seeking to make genetic information a standard element of
healthcare decisions in the future. The accumulation of genetic and patient
information will ultimately enable the healthcare ecosystem and stakeholders,
including patients, providers and physicians, payers, pharmaceutical partners
and more to achieve improved outcomes.

Russia and Ukraine Conflict

During the first quarter of 2022, Russia commenced a military invasion of
Ukraine, and the ensuing conflict has created disruption in the region and
around the world. We have suspended operations in Russia, which has not had and
is not expected to have a material impact on our operating results. We serve
customers globally across a broad geographic base. Neither Russia nor Ukraine
has comprised or is expected to comprise a material portion of our total
revenue, net loss, or net assets. We continue to closely monitor the ongoing
conflict and related sanctions, which could impact our financial results in the
future. Other impacts due to this rapidly evolving situation are currently
unknown and could potentially subject our business to adverse consequences
should the situation escalate beyond its current scope. See Part II, Item 1A.
"Risk Factors" in this Quarterly Report on Form 10-Q for additional information
about the conflict between Russia and Ukraine and its potential effect on our
business and results of operations.

Impact of COVID-19

While we expect the COVID-19 pandemic may continue to impact our business, we
experienced limited disruption during the first three months of 2022 and full
year 2021. We have reviewed and adjusted, when necessary, for the impact of
COVID-19 on our estimates related to revenue recognition and expected credit
losses.

In response to the pandemic we have implemented measures to protect the health
of all of our employees during this time with additional measures in place to
better protect our on-site lab production and support teams. Our production
facilities currently remain fully operational. Substantially all of the
Company's offices have re-opened in a hybrid working model, subject to operating
restrictions which adhere to healthcare guidelines to protect public health and
the health and safety of employees. While we have not experienced significant
disruption in our supply chain, we have experienced supply delays and higher
logistics costs as a result of the COVID-19 pandemic and have also had to obtain
supplies from new suppliers. We have increased our inventory on hand to respond
to potential future disruptions that may occur to ensure we are able to meet
customer demand.

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As a result of government-imposed restrictions, many announced healthcare
guidelines resulted in a shift of regular physician visits and healthcare
delivery activities to remote/telehealth formats. This was particularly
important for patients who, despite the fall-out from COVID-19, continued to be
diagnosed with critical diseases, like cancer, and for women who are pregnant or
are trying to conceive. We believe our investments in new access platforms and
technologies has and will continue to position us well to provide a range of
testing to clinicians and patients using a "clinical care from afar" model. An
example is our rollout in April 2020 of our Gia telehealth platform, which
expands access to remote interaction between patients and clinicians as well as
direct ordering of genetic tests.

Although many government-imposed restrictions have been reduced or eliminated,
the future impact of the COVID-19 pandemic continues to be highly
uncertain. Given the unknown duration and extent of COVID-19's impact on our
business, and the healthcare system in general, we continue to monitor evolving
market conditions and have pivoted our focus and investments on the commercial
execution of workflows that support remote ordering, online support and
telehealth.

In March 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES
Act") was signed into law as a stimulus bill intended to bolster the economy,
among other things, and provide assistance to qualifying businesses and
individuals. The CARES Act included an infusion of funds into the healthcare
system and in January 2021 we received $2.3 million as part of this initiative.
This payment was recognized as other income, net in our consolidated statement
of operations in the period received.

Factors affecting our performance

Number of billable units

Our centralized test revenue is tied to the number of tests which we bill
third-party payers, biopharmaceutical partners, other business-to-business
customers (e.g., hospitals, clinics, medical centers), or patients. Our
decentralized product revenue is based upon the number of individual reactions
we ship biopharmaceutical partners and other business-to-business customers. We
refer to the set of reagents needed to perform an NGS test as a "reaction," and
we refer to billable events that include individual test reports released and
individual reactions shipped as billable units. We typically bill for our
services following delivery of the billable report derived from testing samples
and interpreting the results. For units manufactured for use by customers in
distributed facilities, we typically bill customers upon shipment of those
units. Test orders are placed under signed requisitions or contractual
agreements, as we often enter into contracts with biopharmaceutical partners,
other business-to-business customers and insurance companies. We incur the
expenses associated with a unit in the period in which the unit is processed
regardless of when payment is received with respect to that unit. We believe the
number of billable units in any period is an important indicator of the growth
in our testing business, and with time, this will translate into the number of
customers accessing our platform.

Number and size of research and commercial partnerships

Pharma development service revenue, which we recognize within other revenue in
our consolidated statements of operations, is generated primarily from services
provided to biopharmaceutical companies and other partners and is related to
companion diagnostic development, clinical research, and clinical trial services
across the research, development and commercialization phases of collaborations.
The result of these relationships may include the development of new targeted
companion diagnostics, which underscore and expand the need for genetic testing
and in some cases may lead to intellectual property and/or revenue sharing
opportunities with third-party partners.

In addition to research partnerships, we also seek to grow the number of
biopharmaceutical partners and other business-to-business customers for whom we
provide testing technologies, analysis, supplies and expertise to institutions
that provide independent testing services to customers in their respective
regions.

Success obtaining and maintaining reimbursement

Our ability to increase volume and revenue will depend in part on our success
achieving broad reimbursement coverage and laboratory service contracts for our
tests from third-party payers and agreements with institutions and partners.
Reimbursement may depend on a number of factors, including a payer's
determination that a test is appropriate, medically necessary and
cost-effective, as well as whether we are in contract, where we get paid more
consistently and at higher rates. Because each payer makes its own decision as
to whether to establish a policy or enter into a contract to reimburse for our
testing services and specific tests, seeking these approvals is a time-consuming
and costly process. In addition, clinicians and patients may decide not to order
our

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tests if the cost of the test is not covered by insurance. Because we require an
ordering physician to requisition a test, our revenue growth also depends on our
ability to successfully promote the adoption of our testing services and expand
our base of ordering clinicians. We believe that establishing coverage and
obtaining contracts from third-party payers is an important factor in gaining
adoption by ordering clinicians. Our arrangements for laboratory services with
payers cover approximately 323 million lives, comprised of Medicare, all
national commercial health plans, and Medicaid in most states, including
California (Medi-Cal), our home state.

Ability to lower the costs associated with performing our tests

Reducing the costs associated with performing our genetic tests is both a focus
and a strategic objective of ours. Over the long term, we will need to reduce
the cost of raw materials by improving the output efficiency of our assays and
laboratory processes, modifying our platform-agnostic assays and laboratory
processes to use materials and technologies that provide equal or greater
quality at lower cost, improve how we manage our materials, port some tests onto
a next generation sequencing platform and negotiate favorable terms for our
materials purchases. We also intend to continue to design and implement hardware
and software tools that are designed to reduce personnel-related costs for both
laboratory and clinical operations/medical interpretation by increasing
personnel efficiency and thus lowering labor costs per test. Finally, we plan to
reduce the cost of providing test equipment and software to laboratories and
other facilities in the United States and internationally. Those efforts are
designed to enable more rapid expansion of genetic testing and patient access,
enlarging our geographic footprint outside the United States while achieving
lower costs.

Ability to expand our genetic content and create new pathways to test

We believe our focus on reducing the average cost per test will have a
countervailing force - increasing the number of tests we offer, the content of
each test and the means to connect our testing services with patients and
physicians. We intend to continue to expand our test menus by steadily releasing
additional genetic content for affordable prices, ultimately leading to
affordable whole genome services. The breadth and flexibility of our offering
will be a critical factor in our ability to address new markets, including
internationally, for genetic testing services. Both of these, in conjunction
with our continued focus on strategic partnerships, will be important to our
ability to continue to grow the volume of billable tests we deliver. We have and
intend to continue to identify new ways to connect our testing services and
information to patients. These include direct patient outreach and ordering
capacity, the use of automated assistants for physician customers to improve the
ease of ordering and processing genetic tests and programs designed to reach
underserved patient populations with genetic testing.

Investment in our business and timing of expenses

We plan to continue to invest in our genetic testing and information management
business. We deploy state-of-the-art technologies in our genetic testing
services, and we intend to continue to scale our infrastructure, including our
testing capacity and capabilities as well as our information systems. We plan to
do this through the acquisition of assets and businesses and expansion of our
workforce and facilities, such as our new laboratory and production facility in
North Carolina and the genomic laboratory space added through the acquisition of
Genosity, which we expect to support our continued growth by significantly
expanding our testing capacity. We also expect to incur software development
costs as we seek to further automate our laboratory processes and our genetic
interpretation and report sign-out procedures, scale our customer service
capabilities to improve our customers' experience, and expand the functionality
of our website. We also expect to incur costs as we seek to provide the testing
equipment and software necessary to enable decentralized genetic and genomic
testing in the United States and internationally. We will incur costs related to
marketing and branding as we spread our initiatives beyond our current customer
base and focus on providing access to customers through our website. We plan to
hire additional personnel as necessary to support anticipated growth, including
software engineers, sales and marketing personnel, billing personnel, research
and development personnel, medical specialists, biostatisticians and
geneticists. We will also incur additional costs related to the expansion of our
production facilities to accommodate growth and as we expand domestically and
internationally, including increased operating costs and capital expenditures
related to the buildout of our new laboratory and production facility in North
Carolina. In addition, we will incur ongoing expenses as a result of operating
as a public company. The expenses we incur may vary significantly by quarter as
we focus on building out different aspects of our business.

How we recognize revenue

We generally recognize revenue on an accrual basis, which is when a customer
obtains control of the promised goods or services, typically a test report, or
upon shipment of our precision oncology products. Accrual amounts recognized are
based on estimates of the consideration that we expect to receive, and such
estimates are

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adjusted and subsequently recorded until fully settled. Changes to such
estimates may increase or decrease revenue recognized in future periods. Revenue
from our tests may not be equal to billed amounts due to a number of factors,
including differences in reimbursement rates, the amounts of patient payments,
the existence of secondary payers and claim denials. Some test orders are placed
under signed requisitions or contractual agreements, and we often enter into
contracts with biopharmaceutical partners, other business-to-business customers
and insurance companies that include pricing provisions under which such tests
are billed.

Pharma development service revenue is generated primarily from custom assay
design services, sample processing activities and consultative inputs, which is
separate from revenue generated by any related or unrelated product component.
Revenue is recognized as samples are processed or scope of work is completed
based on contracted agreements with those biopharmaceutical customer companies.

Under these collaborations, we also generate revenue from achievement of
milestones, provision of on-going support, and related pass-through costs and
fees. We generally have distinct performance obligations for development
milestones related to our development of a companion diagnostic device. We use a
cost plus a margin approach to estimate the standalone value of our companion
diagnostic development service performance obligations. Revenue is recognized
over time using input or output methods based on our assessments of performance
completed to date toward each milestone.

Financial overview

Revenue

We primarily generate revenue from testing services and sales of distributed
precision oncology products. Customers are typically billed upon delivery of
test results or shipment of products. We also generate revenue from development
agreements, access to data, data analytics and other related services provided
for biopharmaceutical partners and other parties. Our ability to increase our
revenue will depend on our ability to increase our market penetration, obtain
FDA, and other international regulatory authority approvals on future products
and services offerings, obtain contracted reimbursement coverage from
third-party payers, and grow our relationships with biopharmaceutical customers.

Cost of revenue

Cost of revenue reflects the aggregate costs incurred in delivering our products
and services and includes expenses for materials and supplies, personnel-related
costs, freight, costs for lab services, genetic interpretation and clinical
trial support, equipment and infrastructure expenses and allocated overhead
including rent, information technology, equipment depreciation, amortization of
acquired intangibles, and utilities. We expect cost of revenue to generally
increase in line with the increase in billable volume, however, we expect a
future increase in amortization of acquired intangible assets that is not
dependent on billed volume. We anticipate our cost per unit for existing tests
will generally decrease over time due to the efficiencies we expect to gain as
volume increases and from automation and other cost reductions. These reductions
in cost per unit will likely be offset by new offerings, which often have a
higher costs per unit during the introductory phases before we are able to gain
efficiencies. The cost per unit may fluctuate significantly from quarter to
quarter.

Operating expenses

Our operating expenses are classified into three categories: research and
development, selling and marketing, and general and administrative. For each
category, the largest component is generally personnel-related costs, which
include salaries, employee benefit costs, bonuses, commissions, as applicable,
and stock-based compensation expense.

Research and development

Research and development expenses represent costs incurred to develop our
technology and future offerings. These costs are principally for process
development associated with our efforts to expand the number of genes we can
evaluate, our efforts to lower the costs per unit and our development of new
products to expand our platform. We have and may continue to partner with other
companies to develop new technologies and capabilities we expect to invest
capital and incur significant operating costs to support these development
efforts. In addition, we incur process development costs to further develop the
software we use to operate our laboratories, analyze generated data, process
customer orders, validate clinical activities, enable ease of customer ordering,
deliver reports and automate our business processes. These costs consist of
personnel-related costs, laboratory supplies

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and equipment expenses, consulting costs, amortization of acquired intangible
assets, and allocated overhead including rent, information technology, equipment
depreciation and utilities.

We expense all research and development costs in the periods in which they are
incurred. We expect our research and development expenses to significantly
increase as we continue our efforts to develop additional offerings, make
investments to reduce costs, streamline our technology to provide patients
access to testing, scale our business domestically and internationally and
acquire and integrate new technologies. As a percentage of revenue, we expect
research and development expenses to trend lower as we continue our efforts on
scaling our business and operations and expanding our testing capabilities.

Selling and marketing

Selling and marketing expenses consist of personnel-related costs, including
commissions, client service expenses, advertising and marketing expenses,
educational and promotional expenses, market research and analysis, and
allocated overhead including rent, information technology, equipment
depreciation, amortization of acquired intangibles, and utilities. We expect our
selling and marketing expenses to increase as we continue to build our brand and
focus on advertising our products and services while trending lower as a
percentage of revenue as we continue our efforts on scaling our business and
operations as we expand our testing capabilities.

General and administrative

General and administrative expenses include executive, finance and accounting,
billing and collections, legal and human resources functions as well as other
administrative costs. These expenses include personnel-related costs; audit,
accounting and legal expenses; consulting costs; allocated overhead including
rent, information technology, equipment depreciation, and utilities; costs
incurred in relation to our co-development agreements; and post-combination
expenses incurred in relation to companies we acquire. We expect our general and
administrative expenses to generally increase as we support continued growth of
operations while trending lower as a percentage of revenue as we continue our
efforts on scaling our business and operations as we expand our testing
capabilities.

Change in fair value of contingent consideration

Changes in fair value of contingent consideration are adjustments related to
contingent consideration related to business combinations. We expect these
expenses to fluctuate significantly period to period due to fair value
adjustments that are dependent on many factors, including the value of our
common stock and our assessment of the probability of meeting certain
acquisition-related milestones within the terms of the respective acquisition
agreements, including certain prescribed deadlines for achievement.

With respect to the ArcherDX final milestone, the liability was reduced to nil
as of as of December 31, 2021 from $262.5 million as of March 31, 2021, with the
offsetting change recorded as changes in fair value of contingent consideration
in our consolidated statements of operations. The removal of the liability
balance and the associated change in fair value of contingent consideration was
a result of our reassessment of the steps necessary to achieve clearance or
approval based on FDA feedback received principally in the three months ended
June 30, 2021. Subsequent to March 31, 2022, an agreement was entered into with
previous ArcherDX stockholders to extend the date of achievement of the ArcherDX
Final Milestone to March 31, 2023. We do not believe achievement of the
conditions prescribed in the acquisition agreement will occur within this
timeframe. We expect FDA clearance or approval of a therapy selection IVD at a
later date subject to resolution of the necessary steps. As such, no liability
was recorded as of March 31, 2022.

Other income, net

Other income, net, primarily consists of adjustments to the fair value of our
stock payable liabilities arising from business combinations, and we expect it
to fluctuate significantly from period to period due to the volatility of our
common stock. Other income, net also includes income generated from our cash
equivalents and marketable securities and amounts received under the CARES Act.

Interest expense

Interest expense is primarily attributable to interest incurred related to our
debt and finance leases. See Note 8, "Commitments and contingencies" in Notes to
Consolidated Financial Statements in Part I, Item 1. of this Quarterly Report on
Form 10-Q for additional information.

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Income tax benefit

Since we generally establish a full valuation allowance against our deferred tax
balances, our income tax benefit primarily consists of tax impacts of our
deferred income tax assessments resulting from our acquisitions.

Critical accounting policies and estimates

Management's discussion and analysis of our financial condition and results of
operations is based on our consolidated financial statements, which have been
prepared in accordance with U.S. generally accepted accounting principles, or
U.S. GAAP. The preparation of these financial statements requires us to make
judgments, 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 financial statements, as well as the reported revenue generated and
expenses incurred during the reporting periods. We evaluate our estimates on an
ongoing basis. Our estimates are based on current facts, 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 and any such differences may be material. We believe
that our accounting policies discussed below are critical to understanding our
historical and future performance, as these policies relate to the more
significant areas involving management's judgments and estimates.

There have been no material changes to our critical accounting policies and
estimates as compared to the critical accounting policies and estimates
described in our Annual Report on Form 10-K for the fiscal year ended December
31, 2021. See Note 2, "Summary of significant accounting policies" in the Notes
to Condensed Consolidated Financial Statements in Part I, Item 1. of this
Quarterly Report on Form 10-Q for information regarding recent accounting
pronouncements.

Results of operations

Three Months Ended March 31, 2022 and 2021

The following sets forth our consolidated statements of operations data for each
of the periods indicated (in thousands, except percentage changes). Our
historical results are not necessarily indicative of our results of operations
to be expected for any future period.

                                                     Three Months Ended March 31,                Dollar                %
                                                       2022                   2021               Change             Change
Revenue:
Test revenue                                    $       119,497          $    99,276          $  20,221               20%
Other revenue                                             4,194                4,345               (151)             (3)%
Total revenue                                           123,691              103,621             20,070               19%

Cost of revenue                                          97,116               75,491             21,625               29%
Research and development                                128,236               80,358             47,878               60%
Selling and marketing                                    60,144               51,240              8,904               17%
General and administrative                               51,274               72,517            (21,243)             (29)%
Change in fair value of contingent
consideration                                               154              (63,621)            63,775              100%

Loss from operations                                   (213,233)            (112,364)          (100,869)             (90)%
Other income, net                                        10,439                4,465              5,974               NM
Interest expense                                        (13,985)              (8,393)            (5,592)             (67)%
Net loss before taxes                                  (216,779)            (116,292)          (100,487)             (86)%
Income tax benefit                                      (34,920)              (6,800)           (28,120)              NM
Net loss                                        $      (181,859)         $  (109,492)         $ (72,367)             (66)%


NM - Not Meaningful

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Revenue

The increase in total revenue of $20.1 million for the three months ended
March 31, 2022 compared to the same period in 2021 was primarily due to an
increase in billable volume due to growth in our business, partially offset by a
lower average revenue per unit. Billable volume increased to approximately
322,000 in the three months ended March 31, 2022 compared to 259,000 in the same
period of 2021, an increase of 24 percent. Average revenue per unit decreased to
$372 per unit in the three months ended March 31, 2022 compared to $383 per unit
in the comparable prior period primarily due to changes in product and payer
mix.

Cost of revenue

The increase in the cost of revenue of $21.6 million for the three months ended
March 31, 2022 compared to the same period in 2021 was primarily due to an
increase in billable volume and a higher cost per unit. Cost per unit was $302
in the three months ended March 31, 2022 compared to $290 for the same period in
2021. The cost per unit increased primarily due to changes in product mix, an
increase in amortization of acquired intangible assets of $9.6 million, and a
$3.2 million increase in personnel-related costs as a result of headcount
growth.

Research and development

The increase in research and development expense of $47.9 million for the three
months ended March 31, 2022 compared to the same period in 2021 was due to
growth in the business as well as the impact of acquisitions. The increase in
research and development expenses principally consisted of the following
elements: personnel-related costs increased $36.6 million primarily driven by
acquisition-related stock-based compensation expenses as well as headcount
growth; professional fees increased $8.8 million; other expenses increased
$4.4 million; technology costs increased $1.6 million due to higher spending on
equipment and software licenses; facilities-related expenses increased
$0.7 million; and depreciation and amortization increased $0.6 million. These
increases were offset by a decrease of $4.8 million in lab-related expenses due
to lower costs related to lab services and supplies.

Selling and marketing

The increase in selling and marketing expense of $8.9 million for the three
months ended March 31, 2022 compared to the same period in 2021 was primarily
due to growth in the business and principally consisted of the following
elements: personnel-related costs increased $6.7 million due to headcount
growth; technology costs increased $1.3 million due to higher spending on
software licenses; travel-related costs increased $1.1 million;
facilities-related expenses increased $0.5 million; and professional fees
increased $0.3 million. The increases were offset by a decrease in brand
initiatives and advertising costs of $1.0 million.

General and administrative

The decrease in general and administrative expense of $21.2 million for the
three months ended March 31, 2022 compared to the same period in 2021 was
primarily due to a decrease in personnel-related costs of $25.2 million due to
lower acquisition-related stock-based compensation expense, partially offset by
headcount growth. This decrease was partially offset by increases in
professional services of $2.2 million and other corporate expenses of
$1.8 million.

Change in fair value of contingent consideration

The change in fair value of contingent consideration represented an expense of
$0.2 million and income of $63.6 million for the three months ended March 31,
2022 and 2021, respectively. The prior year period includes fair value
adjustments to reduce our contingent consideration liability primarily related
to our acquisition of ArcherDX and the remaining development milestones.

Other income, net

The increase in other income, net of $6.0 million for the three months ended
March 31, 2022 compared to the same period in 2021 was primarily due to
increases in fair value adjustments of $6.6 million related to our stock payable
liabilities due to the decrease in the price of our common stock.

Interest expense

The increase in interest expense of $5.6 million for the three months ended
March 31, 2022 compared to the same period in 2021 was principally due to
increased debt outstanding as compared to the prior year period.

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Income tax benefit

The increase in income tax benefit of $28.1 million was primarily due to a
$34.6 million release of federal and state valuation allowances as a result of
the reclassification of ArcherDX's STRATAFIDE and PCM in-process research and
development intangibles from indefinite-lived intangibles to developed
technology, which enabled the associated deferred tax liability to serve as a
source of income to existing finite-lived deferred tax assets for which a
valuation allowance had previously been established. There was no similar income
tax benefit in the prior year period. The income tax benefit of $6.8 million for
the three months ended March 31, 2021 was primarily due to the net deferred tax
liabilities assumed in connection with our acquisition of One Codex during
February 2021.

Effective for tax years beginning on or after January 1, 2022, pursuant to the
Tax Cuts and Jobs Act of 2017, companies are required to capitalize and amortize
Internal Revenue Code section 174 research and experimental expenses paid or
incurred over five years for research and development performed in the United
States and 15 years for research and development performed outside of the United
States.

Liquidity and capital resources

Liquidity and capital expenditures

We have generally incurred net losses since our inception. For the three months
ended March 31, 2022 and 2021, we had net losses of $181.9 million and $109.5
million, respectively, and we expect to incur additional losses in the future.
At March 31, 2022, we had an accumulated deficit of $1.9 billion. While our
revenue has increased over time, we may never achieve revenue sufficient to
offset our expenses.

Since inception, our operations have been financed primarily by fees collected
from our customers, net proceeds from sales of our capital stock as well as
borrowing from debt facilities and the issuance of convertible senior notes.

In January 2021, we issued, in an underwritten public offering, an aggregate of
8.9 million shares of our common stock at a price of $51.50 per share, for gross
proceeds of $460.0 million and net proceeds of $434.3 million.

In September 2019, we issued $350.0 million of aggregate principal amount of
convertible senior notes due 2024, which bear cash interest at a rate of 2.0%
per year. Also in September 2019, we used the funds received through the
issuance of our convertible senior notes due 2024 to settle our Note Purchase
Agreement we entered into in November 2018. In April 2021, we issued
$1,150.0 million of aggregate principal amount of convertible senior notes due
2028, which bear cash interest at a rate of 1.5% per year.

In October 2020, in connection with our acquisition of ArcherDX, we entered into
a credit facility to borrow $135.0 million which closed concurrently with the
merger. The terms of this credit facility restrict our ability to incur certain
indebtedness, pay dividends, make acquisitions and take other actions.

At March 31, 2022 and December 31, 2021, we had $0.9 billion and $1.1 billion,
respectively, of cash, cash equivalents, restricted cash and marketable
securities.

Our primary uses of cash are to fund our operations as we continue to grow our
business, enter into partnerships and acquire businesses and technologies. Cash
used to fund operating expenses is affected by the timing of when we pay
expenses, as reflected in the change in our outstanding accounts payable and
accrued expenses.

We have incurred substantial losses since inception, and we expect to continue
to incur losses in the future. We believe our existing cash, cash equivalents
and marketable securities as of March 31, 2022 and fees collected from the sale
of our products and services will be sufficient to meet our anticipated cash
requirements for at least the next 12 months.

We may need or choose to raise additional funding to finance operations prior to
achieving profitability or should we make additional acquisitions. We regularly
consider fundraising opportunities and expect to determine the timing, nature
and size of future financings based upon various factors, including market
conditions and our operating plans. We may in the future elect to finance
operations by selling equity or debt securities or borrowing money. We also may
elect to finance future acquisitions. If we issue equity securities, dilution to
stockholders may result. Any equity securities issued may also provide for
rights, preferences or privileges senior to those of holders of our common
stock. If we raise funds by issuing additional debt securities, these debt
securities would have rights, preferences and privileges senior to those of
holders of our common stock. In addition, the terms of additional debt
securities or borrowings could impose significant restrictions on our
operations. If additional funding is required,

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there can be no assurance that additional funds will be available to us on
acceptable terms on a timely basis, if at all. If we are unable to obtain
additional funding when needed, we may need to curtail planned activities to
reduce costs. Doing so will likely have an unfavorable effect on our ability to
execute on our business plan and have an adverse effect on our business, results
of operations and future prospects.

The following table summarizes our cash flows (in thousands):

Three Months Ended March 31,

                                                                        2022                    2021
Net cash used in operating activities                            $       (147,543)         $   (89,520)
Net cash used in investing activities                                    (449,456)            (273,558)
Net cash (used in) provided by financing activities                          (920)             436,091

Net (decrease) increase in cash, cash equivalents and restricted
cash

                                                             $       

(597,919) $ 73,013

Cash flows from operating activities

For the three months ended March 31, 2022, cash used in operating activities of
$147.5 million principally resulted from our net loss of $181.9 million, a $34.9
million income tax benefit and non-cash charges for remeasurements of
liabilities in connection with business combinations of $9.8 million. These were
partially offset by non-cash charges of $46.8 million for stock-based
compensation, $27.1 million for depreciation and amortization, $3.9 million for
amortization of debt discount and issuance costs related to our outstanding debt
and $1.7 million of post-combination expense. The net effect on cash for changes
in net operating assets was a decrease of cash of $2.8 million.

For the three months ended March 31, 2021, cash used in operating activities of
$89.5 million principally resulted from our net loss of $109.5 million, non-cash
charges of remeasurements of liabilities in connection with business
combinations of $67.0 million primarily relating to ArcherDX development
milestones and a $6.8 million income tax benefit primarily generated from our
acquisition of One Codex. These were partially offset by non-cash charges of
$58.8 million for stock-based compensation, $16.6 million for depreciation and
amortization, $3.0 million of post-combination expense related to the
acceleration of unvested equity from our acquisition of One Codex and $2.7
million for amortization of debt discount and issuance costs related to our
outstanding debt. The net effect on cash of changes in net operating assets was
an increase of cash of $8.9 million.

Cash flows from investing activities

For the three months ended March 31, 2022, cash used in investing activities of
$449.5 million was primarily due to net purchases and maturities of marketable
securities of $428.6 million and cash used for purchases of property and
equipment of $20.8 million.

For the three months ended March 31, 2021, cash used in investing activities of
$273.6 million was primarily due to net purchases of marketable securities of
$251.2 million, net cash used to acquire One Codex of $15.0 million and cash
used for purchases of property and equipment of $6.4 million.

Cash flows from financing activities

For the three months ended March 31, 2022, cash used in financing activities of
$0.9 million primarily consisted of finance lease principal payments of $1.3
million as well as cash received from issuances of common stock of $0.4 million.

For the three months ended March 31, 2021, cash provided by financing activities
of $436.1 million primarily consisted of net proceeds from the public offering
of common stock of $434.3 million and cash received from issuances of common
stock of $2.6 million.

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Contractual obligations

The following table summarizes our contractual obligations, including interest,
as of March 31, 2022 (in thousands):

                                              Remainder of
Contractual obligations:                          2022              2023 and 2024           2025 and 2026           2027 and beyond              Total
Operating leases                             $    17,191          $       51,103          $       50,663          $             76,731       $   195,688
Finance leases                                     4,710                   8,939                     495                             -            14,144
Convertible senior notes                               -                 349,996                       -                     1,150,000         1,499,996
2020 Term Loan                                         -                 135,000                       -                             -           135,000
Purchase commitments                              19,507                  33,598                   2,117                             -            55,222
Total                                        $    41,408          $      578,636          $       53,275          $          1,226,731       $ 1,900,050


See Note 8, "Commitments and contingencies" in the Notes to Condensed
Consolidated Financial Statements in Part I, Item 1. of this Quarterly Report on
Form 10-Q for additional details regarding our leases, convertible senior notes,
2020 Term Loan and purchase commitments.

Off-balance sheet arrangements

We have not entered into any off-balance sheet arrangements.

Recent accounting pronouncements

See "Recent accounting pronouncements" in Note 2, "Summary of significant
accounting policies" in the Notes to Condensed Consolidated Financial Statements
in Part I, Item 1. of this Quarterly Report on Form 10-Q for a discussion of
recently adopted accounting pronouncements and accounting pronouncements not yet
adopted, and their expected effect on our financial position and results of
operations.