GRAIL Inc

CONDENSED CONSOLIDATED BALANCE SHEETS

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

*See Note 1 — Organization And Description Of Business for more information on the Spin-Off.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW

(Unaudited)

NOTE 1. ORGANIZATION AND DESCRIPTION OF BUSINESS

GRAIL, Inc. (“GRAIL” or the “Company”), headquartered in Menlo Park, California, is an innovative commercial-stage healthcare company focused on saving lives and shifting the paradigm of early cancer detection. The Company’s Galleri blood test is a commercially available screening test for early detection of multiple types of cancer.

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. See Note 9 — Legal And Regulatory Proceedings for additional details. GRAIL separated from Illumina on June 24, 2024, as described below. GRAIL was a limited liability company (“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. GRAIL’s common stock is listed under the ticker symbol “GRAL” on the NASDAQ Stock Exchange. 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 9 — 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 8 — Taxes for more information regarding income taxes and Note 9 — 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 5 — Stock-Based Compensation for further details regarding the 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 6 — Related Party Transactions for more information regarding the royalty arrangements with Illumina.

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 (collective, 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 the September 24, 2025 (the 15-month anniversary of the Distribution Date). See Note 9 — Legal And Regulatory Proceedings — Contingencies for details.

Ability to Continue as a Going Concern

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The realization of assets and the satisfaction of liabilities in the normal course of business are dependent on, among other things, the Company’s ability to manage its net loss and to become profitable and operate profitably, to manage the Company’s negative cash flows from operations and to generate positive cash flows from operations, and the Company’s ability to obtain financing to support working capital requirements. The Company had $958.8 million of cash and cash equivalents as of June 30, 2024.

The Company believes that its existing cash and cash equivalents will be sufficient to meet its working capital and capital expenditure needs for at least the next 12 months, as of the date these condensed consolidated financial statements were filed.

As of June 30, 2024, the Company had no off-balance sheet concentrations of credit risk.

Fiscal Year

The Company has a fiscal year end of December 31. Prior to the Spin-Off, the Company’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 Q2 2023 refer to the three and six months ended July 2, 2023 which were 13 weeks and 26 weeks, respectively.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements represent the historical operations of the standalone GRAIL legal entity and include purchase accounting adjustments and certain tax adjustments as if the Company filed a separate income tax return and was not included in Illumina’s consolidated return for the period of time the Company was owned by Illumina. All revenues and costs as well as assets and liabilities directly associated with the business activity of the Company are included in the unaudited condensed consolidated financial statements. Certain assets and liabilities were reflected at fair value under the new basis of accounting established at the closing of Illumina’s acquisition of the Company in August 2021 (“the Acquisition”).

Management considered the need to allocate any historical shared costs incurred by the parent, Illumina, to the accompanying condensed consolidated financial statements. As previously discussed, the European Commission adopted an order requiring Illumina and GRAIL to be held and operated as distinct and separate entities. As no integration ever occurred, management concluded that no material allocations were required. As of December 31, 2023, the Company had generated net operating loss carryforwards for federal and state tax purposes of$3.5 billion and$2.3 billion, respectively. As a single member LLC disregarded for tax purposes, these tax attributes are the sole property of Illumina and remained the assets of Illumina following the Spin-off in accordance with the Internal Revenue Code. However, amounts recognized by the Company are not necessarily representative of the amounts that would have been reflected in the financial statements had the Company operated independently of the parent. Related party transactions with Illumina are discussed further in Note 6 — Related Party Transactions.

These unaudited condensed consolidated financial statements are prepared in accordance with United States Generally Accepted Accounting Principles (“U.S. GAAP”), reflect all normal recurring adjustments that are necessary to present the results fairly, and include the accounts of the Company and its wholly owned subsidiaries for the interim periods presented. All intercompany balances have been eliminated in consolidation.

Significant Accounting Policies

The significant accounting policies used in preparation of these unaudited condensed combined financial statements for the three and six months ended June 30, 2024 and July 2, 2023 are consistent with those discussed in Note 2 — Summary of Significant Accounting Policies, within the consolidated financial statements for the year ended December 31, 2023 included in the Form 10, except as described below.

Stock-Based Compensation Expense

The Company’s stock-based compensation expense includes expenses related to cash-based equity incentive awards, restricted stock units (“RSUs”), and performance stock options. Forfeitures are accounted for as incurred.

In connection with the Spin-Off, GRAIL and Illumina entered into an Employee Matters Agreement pursuant to which the Company’s equity awards were modified (the “Award Modification”). 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. The cash-settled, liability-classified awards were modified to become RSUs that will be settled in shares of the Company’s common stock upon vesting. Unvested performance stock options that were previously held by certain GRAIL employees to purchase Illumina common stock were also converted to options to purchase GRAIL common stock in connection with the Spin-Off. See Note 5 — 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 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.

The grant date fair value of RSUs are determined based on the closing market price of GRAIL’s common stock on the date of the grant (in the case of RSUs resulting from the Award Modification, the date of the Award Modification). Stock-based compensation expense is recognized based on the fair value 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 weighing 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 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.

Provision for (Benefit from) Income Taxes

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 stand-alone financial statements to allow the users to understand the financial position of the Company as a stand-alone 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.

Cash Equivalents

As of June 30, 2024 and December 31, 2023, the Company’s cash equivalents were held in money market funds, totaling $955.9 million and $92.6 million, respectively. In connection with the consummation of the Spin-Off, in June 2024, Illumina provided disposal funding of $932.3 million to the Company in accordance with the Separation and Distribution Agreement. Cash equivalents held in money market funds were categorized as Level 1 investments within the fair value hierarchy.

Except for the accounting policies described above, there were no changes to the Company’s significant accounting policies during the three months ended June 30, 2024 as described in Note 2 — Summary of Significant Accounting Policies to the Company’s audited Consolidated Financial Statements filed with its Form 10 Registration Statement on June 3, 2024.

Concentration Risk

The Company had sales to a single customer that accounted for approximately 10% of total sales for the three and six months ended June 30, 2024 and 10% of total sales for the six months ended July 2, 2023. Amounts due from this same single customer represented approximately 19% and 43% as of June 30, 2024 and December 31, 2023, respectively.

Recently Adopted 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 condensed consolidated financial statements.

Accounting Pronouncements Not Yet Adopted

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 guidance will be effective for the annual reporting periods beginning the year ended December 31, 2024, and for interim reporting periods beginning January 1, 2025, with early adoption permitted, and should be applied retrospectively. The Company is currently evaluating the potential impact of this guidance on its condensed consolidated financial statements.

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 condensed consolidated financial statements.

NOTE 3. 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.

During 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. The assessment was performed using a market approach to determine the fair value of goodwill which utilized thevaluation 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 rate for the goodwill impairment assessment was 51.5%. These estimates and assumptions represent a Level 3 measurement because they include unobservable inputs that are supported by little or no market activity and reflect Company-determined and judgmental factors for these assumptions in measuring 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 $888.9 million as a result of the impairment assessment, primarily due to changes to the forecast of GRAIL’s value and the method for valuing GRAIL.

Intangible Assets

Intangible assets identified in the Acquisition include trade names, developed technology, and in-process research and development (“IPR&D”) and were measured at fair value as of the closing date of Illumina’s acquisition of the Company (“Closing Date”).

The fair values of the developed technologies, trade names and IPR&D were estimated using an income approach, under which an intangible asset’s fair value is equal to the present value of future economic benefits to be derived from ownership of the asset. The estimated fair values were developed by discounting future net cash flows to their present value at market-based rates of return and inclusive of an assumption for technology obsolescence. The useful lives of the intangible assets for amortization purposes were determined by considering the period of expected cash flows used to measure the fair values of the intangible assets, adjusted as appropriate for entity-specific factors including legal, regulatory, contractual, competitive, economic, and other factors that may limit the useful life. The developed technology and trade names assets are amortized on a straight-line basis over their estimated useful lives.

In conjunction with Illumina’s Q2 2024 goodwill impairment assessment, the IPR&D intangible asset of the GRAIL reporting unit was evaluated for potential impairment by Illumina prior to the Spin-Off. The evaluation for a potential impairment of the IPR&D intangible asset was performed by comparing its carrying value to the assessed estimated fair value, which was determined by the income approach, using a discounted cash flow model. 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 IPR&D intangible impairment assessment was 46.5%. Based on the impairment test performed, Illumina assessed and determined that the carrying value of GRAIL’s IPR&D intangible asset exceeded its estimated fair value. As a result of push down accounting, the Company recognized an impairment of $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. This determination was driven by the impact of our post-Spin-Off capital structure, constitution of our Board at the time of the Spin-Off as the key decision maker for the determination, and increased ability to revisit our business strategy and portfolio as a standalone public company without regulatory oversight. This represented a potential impairment indicator. An impairment assessment was performed using a discounted cash flow model utilizing the updated projected cash flows and discount rate. The discount rate selected was 20%. Based on the impairment test performed, the Company assessed and determined that the carrying value of the IPR&D intangible asset exceeded its estimated fair value. As a result, the Company recognized an additional impairment of$112.0 million, primarily due to a decrease in projected cash flows. As of

June 30, 2024, the IPR&D intangible asset had a remaining balance of $28.0 million and had not been completed or abandoned. The IPR&D intangible asset is not currently subject to amortization.

The estimates and assumptions updated in each of these evaluations represent a Level 3 measurement because they include unobservable inputs that are 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 the IPR&D intangible asset.

A recoverability test for the finite-lived intangible assets, which includes developed technology and trade names, was also performed. Based on the assessment performed, no impairment was noted for the finite-lived intangibles.

The estimated future annual amortization of finite-lived intangible assets is shown in the following table. Actual amortization expense to be reported in future periods could differ from these estimates as a result of acquisitions, divestitures, and asset impairments, among other factors.

NOTE 4. BALANCE SHEET COMPONENTS

The following tables present financial information of certain condensed consolidated balance sheets components:

NOTE 5. STOCK-BASED COMPENSATION

Stock-based compensation expense, which includes expense for both equity and liability-classified awards, reported in the condensed consolidated statements of operations, was as follows:

2024 Incentive Award Plan

The GRAIL, Inc. 2024 Incentive Award Plan (the “2024 Plan”) was adopted by GRAIL and approved by Illumina, in its capacity as GRAIL’s sole stockholder, in May 2024 to facilitate the grant of cash and equity incentive awards to non-employee directors, employees, and consultants of the Company and its subsidiaries and to enhance the ability of the Company and any of its subsidiaries to obtain and retain the services of these individuals following the Spin-Off. This plan authorizes the issuance of stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalents, performance-based awards, and other stock or cash based awards. The maximum number of shares authorized for issuance under the 2024 Plan is the sum of (a)

8,656,817 shares; and (b) annual increase on the first day of each calendar year beginning on and including January 1, 2025 and ending on and including January 1, 2034, equal to the lesser of (i)5% of the aggregate number of shares outstanding on the final day of the immediately preceding calendar year and (ii) such smaller number of shares as is determined by the GRAIL board of directors. As of June 30, 2024, approximately 2.1 million shares remained available for future grants under the 2024 Plan.

A summary of the Company’s restricted stock unit activity is as follows:

2024 Employee Stock Purchase Program

The GRAIL, Inc. 2024 Employee Stock Purchase Plan (the “ESPP”) was adopted by GRAIL and approved by Illumina, in its capacity as GRAIL’s sole stockholder, in May 2024. As previously disclosed in the Information Statement, the number of shares of Company common stock initially available under the ESPP is equal to (a)414,021 (b) an annual increase on the first day of each calendar year beginning on and including January 1, 2025 and ending on and including January 1, 2034, equal to the lesser of (i)1% of the aggregate number of shares outstanding on the final day of the immediately preceding calendar year and (ii) such smaller number of shares as is determined by the GRAIL board of directors. There are 0.4 million shares of Company common stock initially available for issuance pursuant to the ESPP. As of June 30, 2024, no shares had been granted under the ESPP plan.

2024 Transition Incentive Award

During the second quarter of 2024, one-time cash-based incentive awards were granted to GRAIL employees, including executives, for retention purposes (“2024 Transition Incentive Awards”) with a total grant date fair value of $40.2 million which were treated as a liability-classified awards. Each award vests entirely inone year or less from its grant date, subject to the applicable holder’s continued service through the vesting date or, if earlier upon (i) the applicable holder’s termination due to death or disability or (ii) following a “change in control” (as defined in the award agreement evidencing the 2024 Transition Incentive Award), the applicable holder’s termination without “cause” or for “good reason” (each as defined in the award agreement evidencing the 2024 Transition Incentive Award). In connection with the Spin-Off, the 2024 Transition Incentive Awards were converted into GRAIL RSUs in accordance with the Employee Matters Agreement by dividing the aggregate award value by the volume-weighted average share price over the first four trading days following the Spin-Off. On the modification date, June 28, 2024, the liability-classified awards in the amount of $4.4 million were reclassified to Additional Paid-In Capital. As the result of this modification, the 2024 Transition Incentive Awards that were outstanding on the Distribution Date were converted into GRAIL RSUs covering 2.5 million shares.

Cash-Based Equity Awards

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 increased or decreased in value based on corresponding changes in GRAIL’s calculated value. GRAIL’s stand-alone value calculation was estimated by the Company based on its analysis and on input from independent valuation advisors. To estimate the value of GRAIL for the purposes of the Cash-Based Equity Awards, various assumptions were used, including long-range financial projections, as well as the discount rate and terminal growth rate. The awards generally vested infour equal installments on the first four anniversaries of the grant date, subject to continued employment through the applicable vesting date. In April 2024, Illumina’s Compensation Committee and Board of Directors (as applicable) approved an adjustment of the ordinary course payouts for all outstanding Cash-Based Equity Awards providing that the Cash-Based Equity Awards would be paid based on their nominal (face) values 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 based on such nominal (face) value in accordance with their applicable vesting schedules. The payments in respect of the Cash-Based Equity Awards between the adoption of such adjustment and the Distribution Date were paid out in cash at the applicable Cash-Based Equity Awards’ nominal (face) value. Payments in respect of the Cash-Based Equity Awards before such adjustment were paid out in cash based on the adjusted value of the Cash-Based Equity Award on the applicable vesting date.

In connection with the Spin-Off, outstanding Cash-Based Equity Awards were modified and converted into GRAIL RSUs in accordance with the Employee Matters Agreement determined by dividing the Aggregate Award Value (as discussed below) for such Cash-Based Equity Award by the volume-weighted average share price of GRAIL stock on the first four trading days following the Spin-Off. All other terms and conditions of the awards, including vesting and payment terms, were unaffected by the conversion. All other terms and conditions of the awards, including vesting and payment terms, were unaffected by the conversion.

For each Cash-Based Equity Award, the “Aggregate Award Value” is equal to, (i) for the portion of such award originally scheduled to vest in 2024, the initial grant value of such portion, and (ii) for the remaining unvested portion of such award, the initial grant value of such portion adjusted up or down based on a percentage, with such percentage determined by (A) GRAIL’s average closing market capitalization for the four trading days immediately following the distribution date minus the aggregate equity value of GRAIL at the time the Cash-Based Equity Award was granted, as reflected in the consolidated financial statements of Illumina (the “Baseline Equity Value”), divided by (B) the Baseline Equity Value.

Upon modification, the awards became equity-classified. The value of tranches of the Cash-Based Equity Awards that vest in future years (exclusive of the 2024 Transition Incentive Awards described above) was reduced and, as a result, there was no incremental compensation cost. Approximately 1,300 grantees were impacted by this modification. On the modification date, June 28, 2024, the liability-classified awards were reclassified to Additional Paid-In Capital at their fair value in the amount of $50.3 million. Due to the higher value of the 2024 tranche of the Cash-Based Equity Awards, compensation cost will be recognized over the vesting period to ensure compensation cost has been recognized at least equal to the amount that is legally vested. As the result of this modification, the Cash-Based Equity Awards that were outstanding on the Distribution Date were converted to 4.0 million RSUs to be settled in GRAIL shares.

Cash-Based Equity Award activity was as follows:

Performance-Based Award

The Company has one performance-based award outstanding for a former employee for which vesting is based on future revenues. The award has an aggregate potential value of up to $78.0 million and expires, to the extent unvested, in August 2030. One-fourth of the total potential value of the award vests immediately upon the achievement of cumulative net revenues in any period of four consecutive fiscal quarters of $500.0 million, $750.0 million, $1.5 billion, and $2.0 billion. The Company assesses the probability of achieving the performance conditions associated with the award on a quarterly basis at each reporting period. If and to the extent that the liability becomes due and payable prior to 12:01 a.m. Eastern Time December 24, 2026 (the “Disposal Funding Period”) and paid by GRAIL, in cash, during the Disposal Funding Period, Illumina shall reimburse GRAIL all or such portion of the liability paid by GRAIL in accordance of the terms of the Separation and Distribution Agreement. As of June 30, 2024, it was not probable that the performance conditions associated with the award will be achieved and, therefore, no stock-based compensation expense, or corresponding loss recovery asset or liability, has been recognized in the condensed consolidated financial statements.

Performance Options

In connection with the Spin-Off, unvested performance-based stock options previously issued to GRAIL employees to purchase Illumina common stock were converted into performance-based stock options to purchase GRAIL common stock (“Performance Options”) in accordance with the Employee Matters Agreement. As of the Distribution Date, there were two remaining unvested Performance Options. On June 28, 2024, the modification date, the Company accounted for the modification of these two Performance Options as Type I and Type IV modifications, respectively. These options were converted at a ratio equal to the average of the volume weighted average per share price of Illumina stock trading during the four days immediately preceding the Distribution Date divided by the average of volume weighted average per share price of GRAIL common stock on the first four trading days immediately following the Distribution Date. For the Performance Option with Type I modification, the incremental charge recognized of the difference in the fair value of the option before and immediately after the modification was immaterial. As the result of this modification, the Performance Options that were outstanding on the Distribution Date were converted to 0.1 million options which remain outstanding as of June 30, 2024. For the Performance Option with Type IV modification, the fair value of the award as of the Modification Date will be used for expense purposes once the award becomes probable of achievement.

As of June 30, 2024, approximately$2.2 million of total unrecognized compensation cost related to the Performance Options was expected to be recognized over a period of approximately 3.2 years. There wereno outstanding Performance Options exercisable as of June 30, 2024. The aggregate intrinsic value of the Performance Options outstanding as of June 30, 2024 and December 31, 2023 was $0.2 million and $0.9 million, respectively. The outstanding Performance Options, in general, have contractual terms often years from the respective grant dates. The Performance Options generally vest monthly over three years upon theachievement of Company-specified performance targets and are subject to continued service through the applicable vesting date.

NOTE 6. RELATED PARTY TRANSACTIONS

Illumina Purchases and Sales

The Company was a subsidiary of Illumina, Inc. between August 19, 2021 to June 23, 2024. Subsequent to the Spin-Off, Illumina retained a 14.5% stake in the Company. Illumina is both a customer of the Company and a major supplier of the Company’s reagents and capital equipment. Goods and services transactions with Illumina are invoiced and paid when due.

Goods and services transactions with Illumina have been reflected in the condensed consolidated financial statements as follows:

The Company has entered into an amendment to its Supply and Commercialization Agreement with Illumina. Under the terms of the amended agreement, regardless of whether its products incorporate any Illumina technology, the Company has agreed to pay to Illumina a high single-digit royalty, subject to certain reductions, in perpetuity on net sales generated by its products or revenues otherwise generated or received by the Company, 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 change of control of the Company, at which time a high-single digit royalty payments will be payable.

Contributions from Member, Net

The following related party transactions between the Company and Illumina have been included in these condensed consolidated financial statements. As there was no intercompany loan agreement between Illumina and GRAIL and because these transactions had no history of being settled and were not settled per the terms of the Separation and Distribution Agreement, the total net effect of these transactions are reflected in the condensed consolidated statements of cash flows as cash provided by financing activities and in the condensed consolidated balance sheets as contribution from member, net, in member’s equity. The following table presents the components of the net transfers to and from Illumina:

Twist Bioscience Relationship

Mr. Robert Ragusa was appointed as the Company’s chief executive officer in October 2021. Mr. Ragusa also serves on the board of directors of Twist Bioscience (“Twist”), a supplier to the Company. Transactions with Twist beginning when Mr. Ragusa became the Company’s chief executive officer are reflected in the condensed consolidated financial statements as related party transactions.

Related party transactions with Twist have been reflected in the condensed consolidated financial statements as follows:

NOTE 7. NET LOSS PER SHARE

Prior to the completion of the Spin-Off from Illumina, the Company hadno common shares issued and outstanding. In connection with the Spin-Off, on June 24, 2024, there were 31.0 million shares of GRAIL common stock distributed to Illumina stockholders. This share amount is utilized for the calculation of basic and diluted earnings per share for all periods presented prior to the Spin-Off. For the three and six months ended June 30, 2024 and July 2, 2023, these shares are treated as issued and outstanding for purposes of calculating historical earnings per share. Since the Company was in a loss position for all periods presented, basic net loss per share is the same as diluted net loss per share, as the inclusion of all potential shares of common stock outstanding would have been anti-dilutive. For the three and six months ended June 30, 2024 and July 2, 2023 the amount of common stock equivalents excluded from the calculation of diluted net loss per share for the periods presented was 6.7 million shares of common stock equivalents.

The following table presents the calculation of the Company’s basic and diluted net loss per share attributable to common stockholders:

NOTE 8. TAXES

For interim financial statement purposes, U.S. GAAP provision (benefit) for taxes related to ordinary income is determined by applying an estimated annual effective income tax rate against a company’s ordinary income, subject to certain limitations on the benefit of losses. Provision (benefit) for taxes related to items not characterized as ordinary income is recognized as a discrete item when incurred. The estimation of the Company’s income tax provision requires the use of management forecasts and other estimates, application of statutory income tax rates, and an evaluation of valuation allowances. The Company’s estimated annual effective income tax rate may be revised, if necessary, in each interim period.

The worldwide effective income tax rates for the fiscal six months ended June 30, 2024 and July 2, 2023 were 3.37% and 4.41%, respectively. The decrease for the six months ended June 30, 2024 as compared to the six months ended July 2, 2023 primarily relates to the Company’s valuation allowance impacts against pre-tax losses prior to the Spin-off.

As discussed in Note 1 — Organization And Description Of Business and Note 2 — Summary Of Significant Accounting Policies — Basis of Presentation, prior to June 30, 2024, for tax purposes, the Company operated as a subsidiary of Illumina and not as a separately regarded taxable entity. Accordingly, the effective worldwide income tax rate for the six months ended July 2, 2023 was calculated using the separate return method as if the Company filed income tax returns on both a standalone basis and on a carve-out basis.

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 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 yet generate positive taxable income and it was not a separately regarded tax paying entity from Illumina. Because 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; therefore, the tax attributes were only presented in the Company’s stand-alone financial statements to allow the users to understand the financial position of the Company as a stand-alone taxable entity under the Separate-Return Method. The total tax-effected value of the tax attributes, net of 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.

NOTE 9. LEGAL AND REGULATORY PROCEEDINGS

The Company is subject to various claims, complaints, regulatory proceedings, and legal actions that arise from time to time in the ordinary course of business.

Antitrust and Competition Proceedings

On March 30, 2021, the U.S. Federal Trade Commission (“FTC”) issued an administrative complaint seeking to prevent the Acquisition. On September 1, 2022, an administrative law judge issued a decision in favor of the transaction and dismissed the FTC’s complaint. The FTC’s complaint counsel appealed to the full FTC Commission. On March 31, 2023, the FTC Commission issued a decision overturning the administrative law judge’s prior ruling. GRAIL and Illumina appealed the FTC’s decision to the U.S. Court of Appeals for the Fifth Circuit (“Fifth Circuit”). On December 15, 2023, the Fifth Circuit issued its opinion and order, in which the court ruled that the FTC applied the incorrect standard in assessing Illumina’s open offer contract and, on that basis, vacated the FTC order and remanded the case to the FTC for reconsideration of the effects of the open offer contract under the proper standard as described in the Fifth Circuit Court’s decision, and in all other respects upheld the FTC’s decision. The Company expects that completion of the Spin-Off will facilitate prompt resolution of the FTC proceedings. Based on the fact that Illumina had a 14.5% ownership interest in GRAIL at the time of the Acquisition, the Company does not expect that Illumina’s retention of a 14.5% ownership interest in GRAIL as a result of completion of the Spin-Off will affect the resolution of these proceedings.

On April 19, 2021, the European Commission accepted a request for a referral of the GRAIL, Inc. acquisition for European Union merger review, submitted by a Member State of the European Union (France), and joined by several other EEA Member States (Belgium, Greece, Iceland, the Netherlands, and Norway), under Article 22(1) of Council Regulation (EC) No 139/2004 (the “EU Merger Regulation”). On April 28, 2021, Illumina filed an action in the General Court of the European Union (the “EU General Court”) asking for annulment of the European Commission’s assertion of jurisdiction to review the acquisition under Article 22 of the EU Merger Regulation, as the acquisition does not meet the jurisdictional criteria under the EU Merger Regulation or under the national merger control laws of any Member State of the European Union. On July 13, 2022, the EU General Court confirmed the European Commission’s jurisdiction to examine the Acquisition (“EU General Court Article 22 Judgment”). On September 22 and 30, 2022, Illumina and the Company each asked for annulment of the EU General Court Article 22 Judgment and their appeal is currently pending before the Court of Justice of the European Union (“EU Court of Justice”). On March 21, 2024, the Advocate General recommended, in a non-binding Opinion, that the EU Court of Justice annul the General Court’s judgment and the European Commission’s decisions accepting the referral of the GRAIL acquisition for EU merger review. The EU Court of Justice is set to issue its ruling on September 3, 2024.

On October 29, 2021, the European Commission adopted an order imposing interim measures (the “Initial Interim Measures Order”). As the Initial Interim Measures Order was set to expire in 2022, the European Commission adopted new interim measures on October 28, 2022 (the “Second Interim Measures Order”). The Company and Illumina both sought the annulment of the Initial Interim Measures Order, and Illumina also sought the annulment of the Second Interim Measures Order (the Company intervened in this procedure in support of Illumina). All requests for annulment were stayed pending the appeal asking for annulment of the EU General Court Article 22 Judgment.

On September 6, 2022, the European Commission adopted a decision finding Illumina’s acquisition of GRAIL, Inc. incompatible with the internal market in the European Union. On November 17, 2022, Illumina asked for annulment of this decision before the EU General Court (the Company was admitted to intervene in support of Illumina).

On October 12, 2023, the European Commission adopted a decision requiring Illumina to divest the Company and to restore the situation prevailing before the Company’s acquisition by Illumina (the “EC Divestment Decision”). At the Spin-Off, Illumina provided the Company with the required capitalization (two-and-a-half years of funding based on the Company’s long-range plan). The order also permitted Illumina to maintain its royalty arrangement with the Company. On December 22, 2023, Illumina sought the annulment of the EC Divestment Decision before the EU General Court.

On December 17, 2023, following a review of the Fifth Circuit’s opinion, Illumina elected not to pursue further appeals of the decision and announced Illumina’s decision to divest GRAIL through a third-party sale or capital markets transaction. On December 22, 2023, Illumina submitted a divestment plan to the European Commission outlining proposed terms of the divestiture. The divestment plan, outlining the terms of the Company’s divestiture, was approved by the European Commission on April 12, 2024. On June 24, 2024, the Spin-Off was completed in accordance with the terms outlined in the divestment plan and completed the divestment of the Company required by the EC Divestment Decision.

With the completion of the Spin-Off, the Company expects that its role in and the significance to it of these matters will be substantially reduced.

Federal Securities Class Actions.

On November 11, 2023, the first of three securities class action complaints was filed against Illumina and certain of its current and former executive officers in the United States District Court for the Southern District of California. The first-filed case is captioned Kangas v. Illumina, Inc. et al., the second-filed case is captioned Roy v. Illumina, Inc. et al., and the third-filed case is captioned Louisiana Sheriffs’ Pension & Relief Fund v. Illumina, Inc. et al. (collectively, the “Actions”). The complaints generally allege, among other things, that defendants made materially false and misleading statements and omitted material facts relating to Illumina’s acquisition of Grail. The complaints seek unspecified damages, interest, fees, and costs. On January 9, 2024, four movants filed motions to consolidate the Actions and to appoint a lead plaintiff (“Lead Plaintiff Motions”). On April 11, 2024, the Court issued an order consolidating the Actions into a single action (captioned in re Illumina, Inc. Securities Litigation No. 23-cv-2082-LL-MMP), and appointed Universal-Investment-Gesellschaft mbH, UI BVK Kapitalverwaltungsgesellschaft mbH, and ACATIS Investment Kapitalverwaltungsgesellschaft mbH as lead plaintiffs. (the “Lead Plaintiffs”). On June 21, 2024, the Lead Plaintiffs filed a consolidated amended complaint. The amended complaint alleges that GRAIL, in addition to Illumina, and certain of their respective current and former directors and others violated sections 10(b) and 20(a) of the Securities Exchange Act and SEC Rule 10b-5 in connection with Illumina's acquisition of GRAIL and disclosures concerning the same. The Company denies the allegations in the complaints and intend to vigorously defend the litigation. In light of the fact that the lawsuits are in an early stage, the Company cannot predict the ultimate outcome of the suits.

Other Legal Matters

Legal matters include various claims, complaints, and legal actions that arise from time to time. There can be no assurance that existing or future legal proceedings arising in the ordinary course of business or otherwise will not have a material adverse effect on the Company’s business, financial position, results of operations, or cash flows.

The company is involved in various lawsuits and claims arising in the ordinary course of business, including actions with respect to employment matters. In connection with these matters, the Company assesses, on a regular basis, the probability and range of possible loss based on the developments in these matters. A liability is recorded in the condensed consolidated financial statements if it is believed to be probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Since litigation is inherently unpredictable and unfavorable resolutions could occur, assessing contingencies is highly subjective and requires judgments about future events. The Company regularly reviews outstanding legal matters to determine the adequacy of the liabilities accrued and related disclosures. The Company may change its estimates if its assessment of the various factors changes and the amount of ultimate loss may differ from estimates, resulting in a material effect on the Company’s business, financial condition, results of operations, and/or cash flows. As of June 30, 2024, there were no pending litigation with any probable losses that can be reasonably estimated.

Contingencies

Contingencies primarily correspond to claims arising in the ordinary course of business. If necessary, these contingencies will be accrued, to the extent believed to be reasonably estimable to resolve the matter. The accrued contingency amounts are included in other current liabilities. Should the Company not be able to secure the terms it expects, these estimates may change and will be recognized in the period in which they are identified.

In connection with the Spin-Off, Illumina provided the Company with disposal funding in the amount of$932.3 million in accordance with the Separation and Distribution Agreement, subject to a clawback feature. The clawback is triggered if, prior to September 24, 2025 (the 15-month anniversary of the Distribution Date), the Company (i) consummates a change in control of the Company 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 GRAIL 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). If the Company consummates a transaction described in the foregoing clause (i), the Company must return to Illumina a cash amount 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. As of June 30, 2024, no contingency liability was recorded as the contingency loss is not probable.

On June 21, 2024, in connection with the Spin-Off, Illumina and the Company also entered into the Tax Matters Agreement to govern the respective rights, responsibilities and obligations of Illumina and the Company after the Spin-Off with respect to all tax matters and will include restrictions to preserve the tax-free status of the Distribution. The Tax Matters Agreement included a number of restrictions on the Company to preserve the intended tax treatment of the Spin-Off. Breach of any covenant or representation contained in the Tax Matters Agreement will result in liability to specific separation taxes. As of June 30, 2024, as it was not probable that the Company will breach the agreement, no contingency liability was recorded in connection with the Tax Matters Agreement.

NOTE 10. SUBSEQUENT EVENTS

On August 9, 2024, following a portfolio review, the Company’s Board of Directors approved a restructuring plan (“Restructuring Plan”) designed to re-prioritize the Company’s resources to focus on its core MCED business and reduce overall spend as the Company progresses towards completion of registrational studies and premarket approval application (“PMA”) submission.

The Restructuring Plan includes a reduction in the Company’s existing headcount and planned 2024 hires of approximately 30%, inclusive of approximately 350 current full-time employees, or approximately 25% of the existing workforce as of June 30, 2024.

In connection with the Restructuring Plan to be effected in the third and fourth quarters of 2024, the Company estimates that it will incur a restructuring charge in Q3 2024 in the range of approximately$18 to $23 million which primarily consists of severance, benefits, payroll taxes, and other termination related costs, excluding an estimated net benefit in stock based compensation due to the reversal of previously recorded stock-based compensation expenses related to award cancellations.