Personalis(PSNL) - 2021 Q2 - Quarterly Report

PART I—FINANCIAL INFORMATION Item 1. Financial Statements This section presents Personalis, Inc.'s unaudited condensed consolidated financial statements as of June 30, 2021, covering balance sheets, statements of operations, comprehensive loss, stockholders' equity, and cash flows Condensed Consolidated Balance Sheets This section provides a snapshot of the company's financial position, detailing assets, liabilities, and equity as of specific dates Balance Sheet Highlights (in thousands) | Account | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $70,080 | $68,525 | | Short-term investments | $258,827 | $134,765 | | Total current assets | $354,309 | $220,719 | | Total assets | $383,340 | $244,842 | | Liabilities & Equity | | | | Total current liabilities | $34,087 | $40,636 | | Total liabilities | $44,593 | $49,897 | | Total stockholders' equity | $338,747 | $194,945 | - Total assets increased significantly from $244.8 million at the end of 2020 to $383.3 million as of June 30, 2021, primarily driven by an increase in short-term investments following a follow-on equity offering[15][38] Condensed Consolidated Statements of Operations This section presents the company's financial performance over specific periods, detailing revenues, expenses, and net loss Statement of Operations Summary (in thousands, except per share data) | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $21,670 | $19,495 | $42,551 | $38,656 | | Cost of revenue | $13,502 | $14,823 | $26,956 | $29,945 | | Research and development | $11,687 | $6,465 | $21,183 | $12,855 | | Selling, general and administrative | $11,428 | $7,705 | $21,849 | $14,979 | | Loss from operations | $(14,947) | $(9,498) | $(27,437) | $(19,123) | | Net loss | $(14,953) | $(9,255) | $(27,357) | $(18,394) | | Net loss per share | $(0.34) | $(0.29) | $(0.63) | $(0.58) | - Revenue increased for both the three and six-month periods ended June 30, 2021, compared to the prior year, but net loss also widened significantly due to substantial increases in Research and Development and Selling, General and Administrative expenses[18] Condensed Consolidated Statements of Cash Flows This section outlines the company's cash inflows and outflows from operating, investing, and financing activities over specific periods Cash Flow Summary for Six Months Ended June 30 (in thousands) | Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash used in operating activities | $(37,674) | $(23,997) | | Net cash used in investing activities | $(129,649) | $(7,650) | | Net cash provided by financing activities | $168,859 | $1,644 | | Net change in cash and cash equivalents | $1,555 | $(30,004) | - Financing activities provided $168.9 million in cash, primarily from a public offering ($162.3 million net), which offset cash used in operations and significant purchases of available-for-sale debt securities in investing activities[30][154] Notes to Unaudited Condensed Consolidated Financial Statements This section provides detailed explanations and additional information supporting the condensed consolidated financial statements, clarifying accounting policies and significant transactions - The company's principal business is providing sequencing and data analysis services for cancer therapy development and population sequencing initiatives, with the U.S. and Europe as primary markets[31] - In January 2021, the company completed a follow-on equity offering, raising net proceeds of approximately $162.3 million after deducting underwriting discounts, commissions, and offering costs[38][115] Significant Customer Revenue Concentration | Customer | Revenue % (Q2 2021) | Revenue % (H1 2021) | | :--- | :--- | :--- | | VA MVP | 62% | 63% | | Pfizer Inc. | 15% | 14% | - Contract liabilities decreased from $21.0 million at year-end 2020 to $11.5 million as of June 30, 2021, with the company expecting to recognize the substantial majority of its $16.8 million in contracted not recognized revenue within the next quarter[73][74] - Total stock-based compensation expense nearly doubled to $6.7 million for the first six months of 2021, up from $3.1 million in the same period of 2020[106] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's Q2 and H1 2021 financial performance, noting revenue growth from biopharmaceutical demand, increased operating expenses leading to a wider net loss, strong liquidity, and ongoing COVID-19 impacts Overview This section provides a high-level introduction to Personalis, its core business, key customer relationships, recent financing activities, and the impact of the COVID-19 pandemic - Personalis is a cancer genomics company whose NeXT Platform provides comprehensive molecular data on all ~20,000 human genes to biopharmaceutical customers[113] - The company's largest customer is the U.S. Department of Veterans Affairs' Million Veteran Program (VA MVP), for which it delivered the 125,000th whole human genome sequence in June 2021, with cumulative task orders totaling approximately $176 million[113] - The company raised net proceeds of $162.3 million from a follow-on equity offering in January 2021[115] - The COVID-19 pandemic has impacted operations by disrupting business, slowing R&D, affecting supply chains, and delaying sample receipts from customers, including the VA MVP[116] Results of Operations This section analyzes the company's revenue performance by customer type and explains changes in cost of revenue, research and development, and selling, general and administrative expenses Revenue by Customer Type (in thousands) | Customer Type | Q2 2021 | Q2 2020 | Change | H1 2021 | H1 2020 | Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | VA MVP | $13,507 | $14,750 | (8%) | $26,717 | $29,506 | (9%) | | All other customers | $8,163 | $4,745 | 72% | $15,834 | $9,150 | 73% | | Total revenue | $21,670 | $19,495 | 11% | $42,551 | $38,656 | 10% | - Revenue from 'All other customers' grew 72% in Q2 2021, driven by strong demand for NeXT Platform products from large pharmaceutical customers, with NeXT Platform product revenue exceeding $4.5 million in Q2 2021, up from $2.6 million in Q2 2020[134] - Cost of revenue decreased 9% in Q2 2021 and 10% in H1 2021, primarily due to a favorable customer mix (higher-margin non-VA MVP orders) and improved laboratory efficiencies[136][137] - R&D expenses increased 81% in Q2 2021, driven by a $3.6 million increase in personnel-related costs from increased headcount and a $1.0 million increase in sample processing for new product development[136][140] - Selling, general and administrative expenses rose 48% in Q2 2021, mainly due to a $2.5 million increase in personnel costs from higher headcount and a $0.6 million increase in professional services[136][142] Liquidity and Capital Resources This section assesses the company's financial liquidity and capital resources, detailing cash, investments, working capital, funding sources, and cash flow from operations Key Liquidity Metrics (in thousands) | Metric | As of June 30, 2021 | As of June 30, 2020 | | :--- | :--- | :--- | | Cash, cash equivalents, and short-term investments | $328,907 | $105,233 | | Working capital | $320,222 | $77,084 | - The company's primary funding sources through June 30, 2021, have been equity offerings, including $279.0 million from offerings in Jan 2021 and Aug 2020, and $144.0 million from its June 2019 IPO[148] - Net cash used in operating activities was $37.7 million for the first six months of 2021, an increase from $24.0 million in the prior-year period, driven by a larger net loss and changes in working capital[152][153] - Management believes current cash, cash equivalents, and short-term investments are sufficient to fund operations for at least the next 12 months[149] Quantitative and Qualitative Disclosures About Market Risk As a "smaller reporting company," Personalis, Inc. is exempt from providing quantitative and qualitative disclosures about market risk - The company is not required to provide quantitative and qualitative disclosures about market risk because it qualifies as a "smaller reporting company"[165] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2021, with no changes in internal control over financial reporting during the quarter - Management concluded that as of June 30, 2021, the company's disclosure controls and procedures were effective in providing reasonable assurance that required information is recorded, processed, summarized, and reported in a timely manner[166] - There were no changes in the company's internal control over financial reporting during the quarter ended June 30, 2021[167] PART II—OTHER INFORMATION Legal Proceedings The company reports no material legal proceedings during the period - As of the reporting date, the company was not involved in any material legal proceedings[170] Risk Factors This section details significant risks including net losses, customer concentration, operational disruptions, supplier dependence, competition, regulatory complexities for LDTs, cybersecurity, data privacy, intellectual property, and stock volatility Operational, Strategic and Business Risks This section outlines key operational and strategic risks, including a history of net losses, impacts from the COVID-19 pandemic, significant customer concentration, and reliance on sole-source suppliers - The company has a history of net losses, with a net loss of $27.4 million for the six months ended June 30, 2021, and an accumulated deficit of $209.2 million, expecting to incur significant losses for the foreseeable future[179] - The COVID-19 pandemic has negatively impacted productivity, disrupted business, slowed R&D, and caused delays in receiving customer samples, with a future outbreak among laboratory employees potentially curtailing or pausing operations[185] - The company has substantial customer concentration, with the VA MVP accounting for 62% of revenue in Q2 2021 and the top five customers accounting for 87%, and the VA MVP contract expiring in August 2021 without a renewal option[193][195] - Personalis relies on Illumina as the sole supplier for sequencers and associated reagents, with the master subcontractor agreement set to expire in August 2021[201] Regulatory, Legal and Cybersecurity Risks This section addresses risks related to regulatory compliance for LDTs, adherence to privacy and data security laws like HIPAA and GDPR, and potential impacts from security breaches and cyber-attacks - The company's tests are currently marketed as Laboratory Developed Tests (LDTs), subject to the FDA's enforcement discretion, where a policy change or new legislation could require burdensome and costly premarket clearance or approval[235][237] - The company is subject to numerous privacy and data security laws, including HIPAA, HITECH, CCPA, and GDPR, with non-compliance potentially resulting in significant fines, such as GDPR penalties up to the greater of €20 million or 4% of global turnover[262][267] - The company faces risks from security breaches and cyber-attacks, which have increased during the COVID-19 pandemic, where a breach could compromise sensitive data, leading to liability, reputational harm, and business disruption[256][259] Intellectual Property Risks This section covers risks related to intellectual property, including potential infringement of third-party patents, reliance on trade secrets, and the implications of using open-source software - The company's success depends on avoiding infringement of third-party patents, as the genetic testing market is subject to extensive intellectual property litigation, and a lawsuit could force the company to stop sales, pay substantial damages, or obtain licenses on non-commercial terms[291][294] - The company relies on trade secrets and proprietary know-how, and despite confidentiality agreements, there is a risk of unauthorized disclosure or independent development by competitors, which would harm its competitive position[318][319] - The use of "open source" software could, under certain licenses, require the company to disclose its proprietary source code, which would help competitors and adversely affect the business[329] Financial and Market Risks and Risks Related to Owning Our Common Stock This section addresses financial and market risks, including potential refund obligations for customer deposits, stock price volatility, limitations on net operating loss carryforwards, and increased compliance costs as an emerging growth company - As of June 30, 2021, the company held $11.5 million in customer deposits for future services, and if a customer cancels, the company may be required to refund these prepayments, which could strain its cash resources[334] - The market price of the company's common stock may be highly volatile due to factors such as operating results, analyst reports, competition, and general market conditions[338] - The company's ability to use its $159.2 million in federal and $112.7 million in state net operating loss carryforwards may be limited by Section 382 of the Code if an "ownership change" occurs[349] - The company's status as an "emerging growth company" under the JOBS Act will end on December 31, 2021, which will increase its legal and financial compliance costs[362][363] Exhibits This section lists exhibits filed with the Form 10-Q, including corporate governance documents, CEO and CFO certifications, and Inline XBRL financial data - The exhibits filed with this report include corporate governance documents, certifications by the Principal Executive Officer and Principal Financial Officer as required by the Sarbanes-Oxley Act, and financial data in XBRL format[377]