Sophia Genetics(SOPH) - 2021 Q4 - Annual Report

Part I Item 3. Key Information This section details SOPHiA GENETICS' significant risks, including platform expansion, competition, data breaches, and internal financial control weaknesses Risk Factors The company faces substantial operational risks, including platform expansion, competition, cybersecurity, regulatory hurdles, and financial instability - The company identified material weaknesses in internal control over financial reporting, including control environment, accounting policies, and IT general controls, with remediation efforts underway[113][114][115] - A 2020 whistleblower complaint alleged improper revenue recognition of $2.0 million, leading to a reversal of these revenues after an independent review[121] - Risks include RUO product labeling in the U.S. and potential increased FDA regulation of LDTs, which could raise costs and reduce demand[127][130] - Compliance with complex international data privacy laws like GDPR and HIPAA is critical, as non-compliance could lead to significant fines and reputational damage[97][148][150] Item 4. Information on the Company This section provides a comprehensive overview of SOPHiA GENETICS, covering its history, business model, platform, market, and competitive landscape History and Development of the Company SOPHiA GENETICS SA was incorporated in Switzerland in 2011 and completed its IPO on Nasdaq in July 2021 - The company was incorporated as a Swiss stock corporation on March 18, 2011[265] - In July 2021, the company completed its IPO on the Nasdaq Global Select Market under the ticker "SOPH"[267] Business Overview SOPHiA GENETICS offers a cloud-based platform for multimodal data analysis, serving over 790 customers in a $35 billion estimated market - The company's mission is to democratize data-driven medicine by leveraging AI to generate actionable insights from healthcare data[268][270] - As of December 31, 2021, the SOPHiA platform served over 790 customers, analyzed more than 910,000 genomic profiles, and was cited in over 330 peer-reviewed publications[273] Total Addressable Market (2021) | Market | Estimated TAM (in USD) | | :--- | :--- | | Total | $35 billion | | Clinical Applications | $21 billion | | Biopharma Applications | $14 billion | Growth in Genomic Profiles Analyzed | Year | Total Profiles Analyzed | | :--- | :--- | | 2016 | ~80,000 | | 2021 | ~910,000 | - The growth strategy focuses on platform innovation, global customer acquisition (especially U.S.), increased utilization, biopharma expansion, and industry collaborations[379] Organizational Structure SOPHiA GENETICS SA operates through six wholly owned subsidiaries across France, UK, USA, Brazil, Australia, and Italy List of Wholly Owned Subsidiaries | Name of Subsidiary | Jurisdiction of incorporation | | :--- | :--- | | SOPHiA GENETICS S.A.S. | France | | SOPHiA GENETICS LTD | UK | | SOPHiA GENETICS, Inc. | Delaware (USA) | | SOPHiA GENETICS Intermediação de Negócios EIRELI | Brazil | | SOPHiA GENETICS PTY LTD | Australia | | SOPHiA GENETICS S.R.L. | Italy | Property, Plants and Equipment The company leases all facilities, with principal locations in Switzerland, France, and Boston, Massachusetts Primary Leased Facilities (as of Dec 31, 2021) | Location | Primary Function | Approximate Size | | :--- | :--- | :--- | | Saint-Sulpice, Switzerland | Office | 19,000 ft² | | Rolle, Switzerland | Office & Laboratory | 11,800 ft² | | Bidart, France | Office | 3,450 ft² | | Pessac, France | Office | 3,450 ft² | | Boston, MA, USA | Office | 4,880 ft² | Operating and Financial Review and Prospects This section analyzes the company's financial condition and operations, detailing 42% revenue growth to $40.5 million and an increased net loss of $73.7 million Operating Results In 2021, revenue grew 42% to $40.5 million, gross profit reached $25.2 million (62% margin), but rising expenses led to a net loss of $73.7 million Consolidated Statement of Loss Summary (in USD thousands) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Revenue | $40,450 | $28,400 | | Cost of revenue | $(15,229) | $(10,709) | | Gross profit | $25,221 | $17,691 | | Gross margin | 62% | 62% | | Operating loss | $(71,489) | $(37,387) | | Loss for the year | $(73,675) | $(39,339) | | Basic and diluted loss per share | $(1.33) | $(0.93) | Key Operating Performance Indicators | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Platform analysis volume | 243,394 | 161,049 | | Total recurring platform customers | 382 | 314 | | Average revenue per platform customer | $92,028 | $70,004 | | LTV/CAC Ratio | 7.7x | 3.2x | | Net Dollar Retention (NDR) | 142% | 110% | - Operating expense increases were driven by $7.8 million in R&D, $9.6 million in S&M employee costs, and higher G&A due to organizational scale-up and public company expenses[549][550][551] Liquidity and Capital Resources As of December 31, 2021, the company held $193.0 million in cash and $72.4 million in term deposits, primarily funded by $243.4 million IPO proceeds - Principal liquidity sources as of December 31, 2021, included $193.0 million in cash and cash equivalents and $72.4 million in term deposits[558] - In 2021, the company raised $243.4 million gross proceeds from its IPO and $20.0 million from a private placement with a GE Healthcare affiliate[559] Consolidated Statement of Cash Flows Summary (in USD thousands) | Cash Flow Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash used in operating activities | $(57,939) | $(31,730) | | Net cash used in investing activities | $(56,934) | $(24,323) | | Net cash provided by financing activities | $237,773 | $107,045 | Critical Accounting Estimates This section outlines critical accounting estimates, including revenue recognition, software development capitalization, share-based compensation, and goodwill impairment testing - For multi-element revenue recognition, the company uses the residual approach to determine the stand-alone selling price (SSP) of analyses due to variable selling prices[575][590] - Internal software development costs are capitalized upon technical and financial feasibility and amortized straight-line over five years[592] - Share option fair value is measured using an adjusted Black-Scholes model, with post-IPO valuation based on public market close price[595][596][598] - Goodwill is tested annually for impairment by comparing equity value to net assets, with no impairment recorded for 2021[602] Directors, Senior Management and Employees This section details the company's leadership, including executive officers and board members, their $3.5 million cash and $18.4 million stock option compensation, and 518 employees - As of December 31, 2021, the company had 518 employees across 29 countries, with 44% engaged in R&D[656] 2021 Compensation for Directors & Executive Officers | Compensation Type | Aggregate Amount (in USD) | | :--- | :--- | | Paid or Accrued (Cash, benefits) | $3.5 million | | Fair Value of Stock Options Granted | $18.4 million | | Pension/Retirement Benefits | $0.2 million | - The seven-member Board of Directors includes six independent members and operates with Audit, Compensation, and Nomination and Corporate Governance committees[642][643][646] Major Shareholders and Related Party Transactions This section details the company's ownership structure, with major shareholders including Alychlo NV (10.95%) and Generation IM (10.63%), and outlines related party indemnification agreements Major Shareholders (as of Feb 15, 2022) | Shareholder | Percentage Ownership | | :--- | :--- | | Alychlo NV | 10.95% | | Generation IM Sustainable Solutions Fund III, L.P. | 10.63% | | Balderton Capital VI, S.L.P. | 5.26% | | All executive officers and directors as a group | 4.88% | - The company has indemnification agreements with officers and directors and a related person transaction policy requiring audit committee or board approval[667][668] Financial Information This section confirms IFRS-compliant consolidated financial statements, notes no material legal proceedings, and states the company has never paid and does not anticipate paying cash dividends - The company has never paid cash dividends and does not anticipate doing so, intending to reinvest all available funds into business development[671] - As of the report date, the company is not party to any material legal proceedings that would adversely affect its business[670] Item 10. Additional Information This section provides supplementary details on corporate governance, material contracts with partners like GE Healthcare, and Swiss and U.S. tax implications for shareholders - The company has material collaboration and supply agreements with GE Healthcare, IDT, Qiagen, and Twist for digital oncology, radiogenomic analysis, and DNA enrichment kits[686][693][698] - Dividends from profit or reserves are subject to a 35% Swiss federal withholding tax, with potential partial refunds for U.S. holders under the U.S.-Switzerland tax treaty[714][717] - The company believes it was not a PFIC for 2021, but future status is uncertain due to cash holdings, which could have adverse U.S. tax consequences for investors[258][743] Item 11. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are foreign exchange risk (USD/CHF, EUR/CHF) and credit risk, with its largest distributor accounting for 18% of trade receivables Foreign Exchange Rate Sensitivity (Impact on Loss Before Tax) | Exchange Rate Change | 2021 (in USD thousands) | | :--- | :--- | | 10% Increase in USD/CHF | $19,499 | | 10% Decrease in USD/CHF | $(19,499) | | 10% Increase in EUR/CHF | $648 | | 10% Decrease in EUR/CHF | $(648) | - The company is exposed to credit risk, with its largest distributor representing 18% of trade and other receivables in 2021[764] - Interest rate risk is minimal due to no outstanding debt and short-term cash deposits, and inflation has not materially affected operations[759][765] Part II Material Modifications to the Rights of Security Holders and Use of Proceeds In July 2021, the company completed its IPO, raising $220.2 million net, and a concurrent private placement to GE Healthcare for $19.6 million net 2021 Capital Raising Activities | Event | Shares Sold | Price per Share | Net Proceeds | | :--- | :--- | :--- | :--- | | Initial Public Offering (IPO) | 13,519,493 | $18.00 | $220.2 million | | Private Placement (GE Healthcare) | 1,111,111 | $18.00 | $19.6 million | Controls and Procedures Management concluded that disclosure controls were not effective as of December 31, 2021, due to material weaknesses in internal control over financial reporting, with remediation underway - The CEO and CFO concluded that disclosure controls and procedures were not effective due to material weaknesses in internal controls as of the reporting period end[772] - Three material weaknesses identified include insufficient IFRS accounting professionals, lack of formal accounting policies, and ineffective IT general controls related to user access and change management[775] - Remediation efforts involve hiring key accounting personnel, retaining consultants, and improving documentation and formalization of policies and IT controls[776][777] Other Information This section covers governance, including audit committee financial experts, the Code of Ethics, $2.31 million in 2021 accountant fees, and reliance on Swiss governance as a foreign private issuer Principal Accountant Fees (2021) | Service Category | Fees (USD) | | :--- | :--- | | Audit fees | $1,856,044 | | Audit-related fees | $9,834 | | Tax services | $34,273 | | All other fees | $409,389 | | Total fees | $2,309,540 | - As a foreign private issuer, the company relies on Swiss governance practices, exempting it from certain Nasdaq requirements like majority-independent boards[791] - The Board of Directors determined that Didier Hirsch and Milton Silva-Craig are "audit committee financial experts" as defined by the SEC[782] Part III Financial Statements This section presents the audited consolidated financial statements for SOPHiA GENETICS SA for 2019-2021, prepared under IFRS, with an unqualified opinion Consolidated Balance Sheet Summary (in USD thousands) | Account | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total Assets | $320,173 | $132,115 | | Cash and cash equivalents | $192,962 | $74,625 | | Total current assets | $282,855 | $109,694 | | Total non-current assets | $37,318 | $22,421 | | Total Liabilities | $44,773 | $31,605 | | Total current liabilities | $28,603 | $21,587 | | Total non-current liabilities | $16,170 | $10,018 | | Total Equity | $275,400 | $100,510 | - PricewaterhouseCoopers SA issued an unqualified opinion on the consolidated financial statements, confirming fair presentation of financial position and results in conformity with IFRS[804]