Personalis(PSNL) - 2020 Q1 - Quarterly Report

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This report contains forward-looking statements about future operations, financial condition, business strategy, and plans - This report contains forward-looking statements about future operations, financial condition, business strategy, and plans[9] - Actual events or results may differ materially from forward-looking statements due to risks, uncertainties, and assumptions detailed in the "Risk Factors" section[10] - The company undertakes no obligation to update any forward-looking statements to reflect events or circumstances after the report date, except as required by law[12] PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Presents Personalis, Inc.'s unaudited condensed consolidated financial statements and detailed accounting notes Condensed Consolidated Balance Sheets | (in thousands) | March 31, 2020 | December 31, 2019 | | :------------- | :------------- | :---------------- | | Assets | | | | Cash and cash equivalents | $46,694 | $55,046 | | Short-term investments | $73,339 | $73,243 | | Total current assets | $135,416 | $139,578 | | Total assets | $151,878 | $157,291 | | Liabilities & Equity | | | | Total current liabilities | $52,120 | $49,962 | | Total liabilities | $52,676 | $50,601 | | Total stockholders' equity | $99,202 | $106,690 | Condensed Consolidated Statements of Operations | (in thousands, except per share data) | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :---------------------------------- | :-------------------------------- | :-------------------------------- | | Revenues | $19,161 | $14,075 | | Costs of revenues | $15,122 | $10,091 | | Research and development | $6,390 | $5,245 | | Selling, general and administrative | $7,274 | $4,170 | | Total costs and expenses | $28,786 | $19,506 | | Loss from operations | $(9,625) | $(5,431) | | Net loss | $(9,139) | $(5,685) | | Net loss per share, basic and diluted | $(0.29) | $(1.84) | Condensed Consolidated Statements of Comprehensive Loss | (in thousands) | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :------------- | :-------------------------------- | :-------------------------------- | | Net loss | $(9,139) | $(5,685) | | Other comprehensive income (loss), net of tax | | | | Foreign currency translation adjustment | $(5) | $15 | | Change in unrealized gain on available-for-sale debt securities | $84 | — | | Comprehensive loss | $(9,060) | $(5,670) | Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit) | (in thousands, except share data) | Balance—December 31, 2019 | Balance—March 31, 2020 | | :-------------------------------- | :------------------------ | :--------------------- | | Common Stock Shares | 31,243,029 | 31,530,443 | | Common Stock Amount | $3 | $3 | | Additional Paid-In Capital | $247,282 | $248,854 | | Accumulated Other Comprehensive Loss | $(6) | $73 | | Accumulated Deficit | $(140,589) | $(149,728) | | Total Stockholders' Equity | $106,690 | $99,202 | - The accumulated deficit increased to $149.7 million as of March 31, 2020, from $140.6 million at December 31, 2019, primarily due to the net loss incurred[24] Condensed Consolidated Statements of Cash Flows | (in thousands) | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :--------------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash (used in) provided by operating activities | $(8,643) | $66 | | Net cash used in investing activities | $(35) | $(960) | | Net cash provided by financing activities | $323 | $14,386 | | Net change in cash and cash equivalents | $(8,352) | $13,493 | | Cash and cash equivalents, end of period | $46,694 | $33,237 | - Net cash used in operating activities was $8.6 million in Q1 2020, a significant shift from $0.1 million provided in Q1 2019[27] Notes to Unaudited Condensed Consolidated Financial Statements Note 1. Company and Nature of Business - Personalis, Inc. is a cancer genomics company providing sequencing and data analysis services for next-generation cancer therapies and population sequencing initiatives[29] - The company has incurred losses since inception and expects to continue investing resources in business development, product development, and sales and marketing[30] - Services are sold primarily to pharmaceutical/biopharmaceutical companies, universities, non-profits, and government entities, with population sequencing initiatives (e.g., VA MVP) accounting for the majority of revenues[29] Note 2. Summary of Significant Accounting Policies - The financial statements are prepared in accordance with U.S. GAAP and SEC interim reporting rules, with certain information condensed or omitted[31] - The company completed an IPO on June 20, 2019, issuing 9,109,725 shares of common stock at $17.00 per share, generating net proceeds of $139.8 million[35] | Significant Customers | Revenues (Q1 2020) | Revenues (Q1 2019) | Accounts Receivable (Mar 31, 2020) | Accounts Receivable (Dec 31, 2019) | | :------------------ | :----------------- | :----------------- | :--------------------------------- | :--------------------------------- | | VA MVP | 77% | 59% | 36% | 19% | | Pfizer Inc. | <10% | 17% | 12% | 23% | | Indivumed GmbH | <10% | <10% | 22% | 30% | Note 3. Revenues | Customer Type | Three Months Ended March 31, 2020 (in thousands) | Three Months Ended March 31, 2019 (in thousands) | | :------------ | :----------------------------------------------- | :----------------------------------------------- | | VA MVP | $14,756 | $8,343 | | All other customers | $4,405 | $5,732 | | Total | $19,161 | $14,075 | - Revenues from countries outside the United States increased from approximately 2% in Q1 2019 to 9% in Q1 2020[70] - Contracted not recognized revenues were $54.0 million as of March 31, 2020, expected to be recognized over the next 12 months[73] Note 4. Balance Sheet Details | (in thousands) | March 31, 2020 | December 31, 2019 | | :------------- | :------------- | :---------------- | | Inventory and other deferred costs | | | | Raw materials | $3,919 | $1,424 | | Other deferred costs | $2,519 | $3,182 | | Total | $6,438 | $4,606 | | (in thousands) | March 31, 2020 | December 31, 2019 | | :------------- | :------------- | :---------------- | | Accrued and other current liabilities | | | | Accrued compensation | $5,399 | $4,147 | | Operating lease liabilities | $1,107 | $1,361 | | Accrued taxes | $57 | $210 | | Accrued liabilities | $268 | $689 | | Other current liabilities | $544 | $241 | | Total | $7,375 | $6,648 | - Depreciation and amortization expense increased from $1.0 million in Q1 2019 to $1.4 million in Q1 2020[75] Note 5. Fair Value Measurements | (in thousands) | March 31, 2020 Fair Value | December 31, 2019 Fair Value | | :------------- | :------------------------ | :--------------------------- | | Cash and cash equivalents | | | | Cash | $4,015 | $1,271 | | Money market funds | $25,042 | $12,495 | | Commercial paper | $17,637 | $41,280 | | Total cash and cash equivalents | $46,694 | $55,046 | | Short-term investments | | | | Commercial paper | $17,636 | $17,892 | | U.S. government securities | $2,008 | $4,011 | | Corporate debt securities | $12,894 | $13,948 | | U.S. agency securities | $38,603 | $32,794 | | Asset-backed securities | $2,198 | $4,598 | | Total short-term investments | $73,339 | $73,243 | | Total assets measured at fair value | $120,033 | $128,289 | - The company began investing in marketable debt securities in Q3 2019 and has not recorded any impairment charges related to other-than-temporary declines in market value[78] Note 6. Borrowings - No amounts were outstanding under financing arrangements as of March 31, 2020, or December 31, 2019[83] - The Revolving Loan was repaid in full on March 22, 2019, and the Growth Capital Loan was paid off in its entirety on August 14, 2019[87][90] Note 7. Leases - Operating lease cost increased from $0.2 million in Q1 2019 to $0.3 million in Q1 2020[95] - As of March 31, 2020, the weighted average remaining lease term for operating leases was 1.6 years, with a weighted average incremental borrowing rate of 7.2%[95] | Future Minimum Lease Payments (in thousands) | Amount | | :--------------------------------------- | :----- | | 2020 (remaining nine months) | $1,039 | | 2021 | $403 | | 2022 | $319 | | Total future minimum lease payments | $1,761 | | Less: imputed interest | $(98) | | Present value of future minimum lease payments | $1,663 | | Less: current portion of operating lease liability | $(1,107) | | Operating lease liabilities - noncurrent | $556 | Note 8. Redeemable Convertible Preferred Stock - All outstanding Redeemable Convertible Preferred Stock automatically converted into 18,474,703 shares of common stock immediately prior to the IPO closing[99] Note 9. Stock-Based Compensation | Stock-Based Compensation Expense (in thousands) | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :-------------------------------------------- | :-------------------------------- | :-------------------------------- | | Costs of revenues | $143 | $85 | | Research and development | $259 | $164 | | Selling, general and administrative | $847 | $360 | | Total stock-based compensation expense | $1,249 | $609 | - As of March 31, 2020, unrecognized stock-based compensation cost for unvested options was $10.5 million (expected over 2.7 years) and for unvested RSUs was $2.4 million (expected over 2.9 years)[106][113] - A performance-based stock option (PSO) was granted to the CEO in March 2020 for 421,000 shares, vesting upon a market price condition, with an estimated fair value of $3.31 per share[108][110] Note 10. Redeemable Convertible Preferred Stock Warrants - Redeemable convertible preferred stock warrants automatically converted to common stock warrants immediately prior to the IPO closing[123] - The fair value of the preferred stock warrant liability ($2.1 million) was reclassified to additional paid-in capital upon conversion, with no further remeasurements[123] Note 11. Common Stock Warrants - A warrant to purchase 188,643 shares of common stock was exercised in June 2019 prior to the IPO and is no longer outstanding[125] - A warrant to purchase 65,502 shares of common stock was issued in connection with the Growth Capital Loan on March 22, 2019, at an exercise price of $9.16 per share, and remains outstanding as of March 31, 2020[126] Note 12. Commitments and Contingencies - The company is subject to claims and assessments in the ordinary course of business but was not involved in any material legal proceedings as of March 31, 2020[127] - The company enters into contracts with indemnification provisions, but exposure is unknown, and no claims have been paid to date[128] Note 13. Net Loss per Share Attributable to Common Stockholders | (in thousands, except share and per share data) | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :-------------------------------------------- | :-------------------------------- | :-------------------------------- | | Net loss attributable to common stockholders | $(9,139) | $(5,685) | | Weighted-average shares outstanding (basic and diluted) | 31,345,029 | 3,091,342 | | Net loss per share (basic and diluted) | $(0.29) | $(1.84) | - Potentially dilutive securities were excluded from diluted net loss per share calculation for both periods as their inclusion would have been antidilutive due to net losses[130] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion and analysis of financial condition and results of operations for Q1 2020, including COVID-19 impacts Overview - Personalis is a cancer genomics company transforming therapy development by providing comprehensive molecular data via its NeXT Platform for biopharmaceutical customers and population sequencing initiatives[133] | Financial Metric | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | Change (%) | | :--------------- | :-------------------------------- | :-------------------------------- | :--------- | | Revenues | $19.2 million | $14.1 million | 36% | | Net Loss | $9.1 million | $5.7 million | 60% | - The COVID-19 pandemic has impacted operations, leading to limited laboratory access, delayed sample submissions from customers, and restricted in-person meetings, potentially affecting productivity and financial results[137][138] - The company expects its $120.0 million in cash and short-term investments as of March 31, 2020, to sustain operations for at least the next 12 months[136] Components of Operating Results Revenues - Revenues are primarily derived from sequencing and data analysis services for next-generation cancer therapies and large-scale genetic research programs[140] - The company's ability to increase revenues depends on further market penetration, developing new products, advancing operational infrastructure, and expanding marketing efforts[141] Costs and Expenses - Costs of revenues include production materials, personnel, consumables, laboratory supplies, depreciation, and IT/facility costs, expected to increase with revenue but decrease per unit due to economies of scale[143] - Research and development expenses, consisting of payroll, consumables, and facility costs, are expensed as incurred and are expected to increase with new product development and lab automation[144][145] - Selling, general and administrative expenses, including personnel, marketing, and professional services, are expected to increase as the company expands commercial capabilities and scales operations[146][148] Interest Income - Interest income primarily from cash, cash equivalents, and short-term investments, increased significantly in late 2019 and Q1 2020 due to IPO proceeds[149] - Interest income is expected to decline throughout the remainder of 2020 due to recent declines in yields on debt securities[149] Interest Expense - Interest expense was immaterial in Q1 2020 as all outstanding debt was paid off in August 2019 following the IPO[150] Other Income (Expense), Net - Other income (expense), net primarily consists of foreign currency exchange gains and losses[151] - Changes in fair value of convertible preferred stock warrant liability are no longer recorded through income since the IPO[151] Results of Operations Revenues | Customer Type | Three Months Ended March 31, 2020 (in thousands) | Three Months Ended March 31, 2019 (in thousands) | Percentage Change | | :------------ | :----------------------------------------------- | :----------------------------------------------- | :---------------- | | VA MVP | $14,756 | $8,343 | 77% | | All other customers | $4,405 | $5,732 | (23)% | | Total revenues | $19,161 | $14,075 | 36% | - The 77% increase in VA MVP revenues was driven by higher sample volume, partially offset by lower average prices per sample[154] - The 23% decrease in revenues from all other customers was due to lower sample volume, following large pharmaceutical orders fulfilled in 2018-2019, partially offset by new customer samples in Q1 2020[155] Costs and Expenses | Expense Category | Three Months Ended March 31, 2020 (in thousands) | Three Months Ended March 31, 2019 (in thousands) | Percentage Change | | :--------------- | :----------------------------------------------- | :----------------------------------------------- | :---------------- | | Costs of revenues | $15,122 | $10,091 | 50% | | Research and development | $6,390 | $5,245 | 22% | | Selling, general and administrative | $7,274 | $4,170 | 74% | | Total costs and expenses | $28,786 | $19,506 | 48% | - The 50% increase in costs of revenues was primarily due to a $3.0 million increase in production materials, a $0.9 million increase in depreciation/maintenance, a $0.7 million increase in consumables/lab supplies, and a $0.4 million increase in personnel costs[157] - The 22% increase in R&D expenses was mainly due to a $1.1 million increase in personnel-related costs to support new product development and lab automation[158] - The 74% increase in SG&A expenses was driven by a $2.0 million increase in personnel-related costs (headcount) and a $1.0 million increase in professional services (public company-related costs)[159] Interest Income, Interest Expense, and Other Income (Expense), Net | Category | Three Months Ended March 31, 2020 (in thousands) | Three Months Ended March 31, 2019 (in thousands) | Percentage Change | | :------- | :----------------------------------------------- | :----------------------------------------------- | :---------------- | | Interest income | $510 | $84 | 507% | | Interest expense | $(2) | $(184) | (99)% | | Other income (expense), net | $8 | $(152) | 105% | | Total | $516 | $(252) | 305% | - Interest income significantly increased by 507% due to higher average cash and investment balances following the June 2019 IPO[161] - Interest expense decreased by 99% due to the repayment of all outstanding debt in August 2019[162] Liquidity and Capital Resources | (in thousands) | As of March 31, 2020 | As of March 31, 2019 | | :------------- | :------------------- | :------------------- | | Cash and cash equivalents, and short-term investments | $120,033 | $33,237 | | Contract liabilities | $34,408 | $44,315 | | Working capital | $83,296 | $(15,348) | | (in thousands) | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :------------- | :-------------------------------- | :-------------------------------- | | Net cash (used in) provided by operating activities | $(8,643) | $66 | | Net cash used in investing activities | $(35) | $(960) | | Net cash provided by financing activities | $323 | $14,386 | - The company has funded operations primarily from $144.0 million in net IPO proceeds, $89.6 million from redeemable convertible preferred stock issuances, and debt financing[164] - Existing cash and cash equivalents and marketable securities are anticipated to fund operations for at least the next 12 months, but additional capital may be sought if needed[165][166] Investments in Property and Equipment - Capital expenditures were $0.1 million during Q1 2020, primarily for sequencing and data analysis equipment[174] - The relatively low Q1 2020 spending was due to uncertainty from the COVID-19 pandemic, with expectations to increase spending later in 2020 to meet or exceed 2019 totals[174] Debt - All debt, including the Growth Capital Loan, was paid off after the IPO, resulting in zero outstanding debt balances[175] Contractual Obligations - As a smaller reporting company, Personalis, Inc. is not required to provide disclosure on contractual obligations[177] Off-balance Sheet Arrangements - The company had no off-balance sheet arrangements as of March 31, 2020[178] Critical Accounting Policies and Estimates - Critical accounting policies include revenue recognition, valuation of common stock warrants and convertible preferred stock warrants, convertible instruments, stock-based compensation, and income taxes[180] - No material changes to critical accounting policies were noted, except for a new estimate related to a performance-based stock option granted to the CEO in Q1 2020[181][182] JOBS Act Accounting Election - As an emerging growth company, Personalis irrevocably elected not to use the extended transition period for complying with new or revised financial accounting standards[184] Recent Accounting Pronouncements - The company is currently evaluating the impact of ASU 2016-13 (Credit Losses) on its consolidated financial statements, with an effective date for smaller reporting companies in Q1 2023[68] Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Personalis, Inc. is exempt from market risk disclosures - The company is exempt from providing quantitative and qualitative disclosures about market risk as a smaller reporting company[186] Item 4. Controls and Procedures Management evaluated disclosure controls and reported no material changes in internal control over financial reporting in Q1 2020 Evaluation of Disclosure Controls and Procedures - Management, with CEO and CFO participation, concluded that disclosure controls and procedures were effective at a reasonable assurance level as of March 31, 2020[187] Changes in Internal Control Over Financial Reporting - There were no changes in internal control over financial reporting during the first quarter of 2020 that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[188] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is not involved in any material legal proceedings adversely affecting its business or financial condition - The company is not presently a party to any legal proceedings that, if determined unfavorably, would have a material adverse effect on its business, financial condition, operating results, or cash flows[191] - Litigation, regardless of outcome, can adversely impact the company due to defense and settlement costs, diversion of management resources, and other factors[191] Item 1A. Risk Factors Outlines risks and uncertainties that could materially affect the company's business, financial condition, and results of operations Risks Related to Our Business and Strategy - The company has a history of net losses and expects to incur significant losses for the foreseeable future, with an accumulated deficit of $149.7 million as of March 31, 2020[193] - The ongoing COVID-19 pandemic poses risks to operations, including potential negative impacts on productivity, disruptions to the supply chain, and delays from customers and partners due to shelter-in-place orders[197][198][200] - The company faces substantial customer concentration, with the VA MVP accounting for 77% of Q1 2020 revenues, posing risks if demand or funding is substantially reduced[205][206] - Reliance on a limited number of sole suppliers (e.g., Illumina for sequencers and reagents) creates supply chain risks; transitioning to new suppliers would be time-consuming and expensive[212][213] - The company's inability to raise additional capital on acceptable terms in the future may limit its ability to continue operations and expand, potentially requiring delays or reductions in R&D or sales/marketing initiatives[216][218] Risks Related to Government Regulation - The company's laboratory developed tests (LDTs) may become subject to increased FDA regulation as medical devices, potentially requiring premarket clearance or approval and compliance with extensive regulatory requirements[261][262][265] - Failure to comply with federal, state, and foreign laboratory licensing requirements (e.g., CLIA, New York State Department of Health) could result in loss of ability to perform tests, business disruptions, and administrative or judicial sanctions[276][278] - Compliance with numerous federal and state fraud and abuse laws (e.g., Anti-Kickback Statute, Stark Law, False Claims Act) is complex and expensive; violations could lead to substantial penalties and reputational harm[281][283] - Expansion into international markets would subject the company to increased regulatory oversight, economic, social, health, and political uncertainties, and anti-bribery laws like the FCPA[284][285] - Changes in healthcare policy, such as the ACA and PAMA, could increase costs, decrease revenues, and impact sales and reimbursement for tests[288][292][293] Risks Related to Our Intellectual Property - The company faces risks of third-party claims of intellectual property infringement, misappropriation, or other violations, which could lead to costly litigation, injunctions, and substantial damages[295][297][298] - Inability to license necessary third-party technologies on reasonable terms could prevent commercialization of new products and adversely affect the business[301][302] - Developments or uncertainty in patent law (e.g., AIA, patent case law) may impact the validity, scope, or enforceability of patent rights, impairing the ability to protect products[304][307][308] - Failure to obtain and enforce broad patent protection, or challenges to existing patents, could allow competitors to develop similar technologies, harming the company's competitive position[310][312][313] - Inability to protect the confidentiality of trade secrets and know-how, or their independent development by competitors, would harm the company's business and competitive position[322][324] Risks Related to Our Common Stock - The market price of common stock may be volatile or decline significantly due to fluctuations in operating results, analyst expectations, competition, and general market conditions, including the COVID-19 pandemic[341][343] - Future sales of shares by existing stockholders, or the perception of such sales, could cause the stock price to decline due to dilution or increased supply[347][348] - The company does not currently intend to pay dividends, so investment returns will depend on appreciation of the common stock's value[350] - Delaware law and provisions in the company's amended and restated certificate of incorporation and bylaws could make a merger, tender offer, or proxy contest difficult, potentially depressing the trading price of common stock[356][357] - Material weaknesses in internal control over financial reporting, if identified and not remediated, could lead to inaccurate or untimely financial reporting, SEC sanctions, and reputational damage[370][373] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No material change in the planned use of IPO proceeds from the final prospectus filed on June 20, 2019 - There has been no material change in the planned use of proceeds from the company's IPO as described in its final prospectus[376] Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities - The company reported no defaults upon senior securities[377] Item 4. Mine Safety Disclosures The company reported no mine safety disclosures - The company reported no mine safety disclosures[378] Item 5. Other Information CEO John West's employment agreement was amended, replacing disability benefits and a bonus with a performance-based stock option - The employment agreement of CEO John West was amended to replace special short- and long-term disability benefits with standard disability benefits and a long-term bonus with a performance-based stock option[379] Item 6. Exhibits Lists exhibits filed with Form 10-Q, including corporate documents, CEO employment amendment, and officer certifications - Key exhibits include the Amended and Restated Certificate of Incorporation, Amended and Restated Bylaws, and an Amendment to Employment Terms Letter for John West[381] - Certifications of Principal Executive Officer and Principal Financial Officer (Exhibits 31.1, 31.2, 32.1, 32.2) are included, with 32.1 and 32.2 not deemed filed with the SEC[381][383] Signatures The report was signed by Aaron Tachibana, Chief Financial Officer, on May 7, 2020 - The report was signed by Aaron Tachibana, Chief Financial Officer, on May 7, 2020[387][388]