Personalis Inc

Note 8. Tempus Agreement

Overview

On November 25, 2023, the Company entered into a Commercialization and Reference Laboratory Agreement (the “Tempus Agreement”) with Tempus pursuant to which Tempus will market the Company's NeXT Personal Dx test in the United States and the Company will conduct development activities to analytically validate the test in breast cancer, lung cancer and immuno-oncology monitoring indications. The Company will perform tests ordered by patients through Tempus and the Company will bill such patients or payors.

In consideration of the Company performing development activities, Tempus will pay the Company fees of up to $12 million (the "Market Development Fees"), consisting of an activation fee of $3 million, a first milestone fee of $3 million(upon achievement of a specified clinical validation), and a second milestone fee payable in six quarterly installments totaling $6 million (subject to achieving two additional clinical validations). The Company has achieved all three clinical validations such that both milestones have been met.

The Company will compensate Tempus for the fair market value of order requisition services (Tempus will enable its base of ordering providers to order the Personalis test and provide specimen collection and procurement support) and results delivery services (Tempus will provide results delivery services from test completion to report delivery) on a per-test basis. In addition, the parties will perform co-promotion activities and the Company will compensate Tempus for the fair market value of promotional and commercialization services provided by Tempus in an amount up to $9.6 million.

The Tempus Agreement also grants Tempus access to, and the right to use, initial and longitudinal genomic data derived from performance of the tests. If Tempus licenses such data to a third party and Tempus recognizes revenue from such license, Tempus will pay the Company a percentage of its gross revenues attributable to such license that is in the range of 10 to 20 percent. Such revenue share shall be payable during the term of the Tempus Agreement and for 10 years thereafter.

Additionally, in consideration of Tempus' obligations to the Company under the agreement, on November 28, 2023, the Company issued warrants to Tempus. See "Tempus Warrants" section further below for discussion.

Pursuant to the agreement, the Company will not allow another third party to market the test in such indications and Tempus will not market another tumor-informed molecular residual disease test for use in such indications (whether its own or that of a third party), in each case subject to certain exceptions. These exclusivity obligations terminate on December 31, 2027, to the extent they do not expire earlier. In addition, each party has the right to convert the Tempus Agreement to a non-exclusive arrangement upon the occurrence of certain specified events.

The term of the Tempus Agreement is five years, which may be extended for successive one-year terms. Either party may terminate the Tempus Agreement for convenience upon 18 months prior written notice.

Impact of Tempus Agreement on the Financial Statements

The Company had achieved the first clinical validation milestone at the time of entering the Tempus Agreement and was therefore entitled to Market Development Fees of $6 million, consisting of the first milestone fee of $3 million and the activation fee of $3 million. These proceeds of $6 million were received in 2023 and allocated to the Tempus Warrants.

The remainder of Market Development Fees—$6 million, payable in six quarterly installments—are recorded as a liability when received and offset against promotional fees as they are paid by the Company to Tempus. Such promotional fees are included in selling, general and administrative expenses in the consolidated statements of operations and were immaterial for the periods presented. As of June 30, 2024, $1 million of the aforementioned $6 million Market Development Fees have been received.

Tempus Warrants

In consideration of Tempus’ obligations to Personalis under the agreement, on November 28, 2023, the Company issued to Tempus (1) a warrant to purchase up to 4,609,400 shares of Personalis common stock at an exercise price per share of $1.50, with an expiration date of December 31, 2024 (the “First Warrant”), and (2) a warrant to purchase up to 4,609,400 shares of Personalis common stock at an exercise price per share of $2.50, with an expiration date of December 31, 2025 (the “Second Warrant” and, together with the First Warrant, the “Tempus Warrants”). The Tempus Warrants are exercisable for cash at any time prior to the applicable expiration date, may be net exercised in certain circumstances, and will be automatically net exercised in connection with a change of control of Personalis if the value ascribed to the consideration to be paid for one share of common stock is greater than the applicable exercise price. If Tempus acquires any shares of common stock directly from the Company other than by exercising the Tempus Warrants (any such shares, “Non-Warrant Shares”), then the total number of shares issuable upon exercise of the Tempus Warrants will be reduced by the Non-Warrant Shares on a share-for-share basis, proportionally between the First Warrant and the Second Warrant based on how many shares are then underlying the Tempus Warrants. Subject to limited exceptions, neither the warrants nor any interest therein may be transferred or assigned without the prior written consent of Personalis.

Because the number of shares issuable upon settlement are subject to adjustment if Tempus acquires Non-Warrant Shares, the Tempus Warrants are classified as liability instruments and are subject to remeasurement at each balance sheet date, with changes in fair value recognized as Other Income (Expense) in the condensed consolidated statements of operations. Fair values of the warrants are estimated using the Black-Scholes option-pricing model. See Note 5 Fair Value Measurements for discussion of inputs used in the measurements of the Tempus Warrants and the resulting gains recognized in the consolidated statements of operations.