(EDGAR Online via COMTEX) -- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes and other financial information included elsewhere in this Annual Report on Form 10-K. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. You should review the sections titled "Special Note Regarding Forward-Looking Statements" for a discussion of forward-looking statements and in Part I, Item 1A, "Risk Factors" for a discussion of factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis and elsewhere in this Annual Report on Form 10-K.
We are a growing cancer genomics company transforming the development of next-generation therapies by providing more comprehensive molecular data about each patient's cancer and immune response. We designed our NeXT Platform to adapt to the complex and evolving understanding of cancer, providing our biopharmaceutical customers with information on all of the approximately 20,000 human genes, together with the immune system, in contrast to many cancer panels that cover roughly only 50 to 500 genes. In parallel with the development of our platform technology, we have also pursued business within the population sequencing market, and we have provided whole genome sequencing services under contract with the U.S. Department of Veterans Affairs (the "VA") Million Veteran Program (the "VA MVP"), which has enabled us to innovate, scale our operational infrastructure, and achieve greater efficiencies in our lab. In September 2020, we announced receipt of a new task order from the VA MVP with an approximate value of up to $31 million. The cumulative value of task orders received from the VA MVP since inception is approximately $175 million, approximately $132.5 million of which we had recognized as revenue as of December 31, 2020.
In August 2020, we launched NeXT Liquid Biopsy, which is a liquid biopsy assay that analyzes all of the approximately 20,000 human genes versus the more narrowly focused liquid biopsy assays that are currently available. By combining technological innovation, operational scale, and regulatory differentiation, our NeXT Platform is designed to help our customers obtain new insights into the mechanisms of response and resistance to therapy as well as new potential therapeutic targets. Our platform enhances the ability of biopharmaceutical companies to unlock the potential of conducting translational research in the clinic rather than with pre-clinical animal models or cancer cell lines. We also announced in January 2020 a diagnostic test, NeXT Dx Test, which is based on our NeXT Platform, that we envision being used initially by both leading clinical cancer centers as well as biopharmaceutical companies. Most recently, in December 2020, we launched two new capabilities that are integrated into our NeXT Platform: our Systemic HLA Epitope Ranking Pan Algorithm ("SHERPA") machine learning-based tool for the comprehensive identification and characterization of cancer neoantigens, as well as our Neoantigen Presentation Score ("NEOPS") for predicting cancer immunotherapy response. SHERPA enables the development of new neoantigen-based diagnostic biomarkers, such as our NEOPS, and novel personalized therapies.
We have the capacity to sequence and analyze approximately 200 trillion bases of DNA per week in our facility. We believe our capacity for this is already larger than the sequencing capacities of most cancer genomics companies, and we continue to build automation and other infrastructure to scale further as demand increases and in support of our NeXT Liquid Biopsy. To date, we have sequenced more than 150,000 human samples, of which more than 100,000 were whole human genomes.
On August 14, 2020, we completed a follow-on equity offering in which we issued and sold 6,578,947 shares of common stock at a public offering price of $19.00 per share. We received net proceeds of $117.5 million after deducting underwriting discounts and commissions. We also incurred $0.4 million of offering expenses, including legal, accounting, printing and other offering-related costs.
Subsequent to the fiscal period ended December 31, 2020 covered by this Annual Report on Form 10-K, on January 29, 2021, we completed another follow-on equity offering in which we issued and sold 3,950,000 shares of common stock at a public offering price of $38.00 per share. We received net proceeds of $141.1 million after deducting underwriting discounts and commissions. The underwriters exercised their option to purchase an additional 592,500 shares shortly thereafter, resulting in additional net proceeds to us of $21.2 million after deducting underwriting discounts and commissions. In total, we raised net proceeds of $162.3 million after deducting underwriting discounts and commissions. We also incurred an estimated $0.4 million of offering expenses, including legal, accounting, printing and other offering-related costs.
Our operations have been impacted by the ongoing COVID-19 pandemic. While the state and county reopening and health orders applicable to us allow for continued operation of so-called Essential Businesses, which includes certain critical healthcare operations and services, we have substantially closed our office facilities and limited access to our laboratory facilities to protect our employees and to comply with the provisions described within the orders. We provided temporary increased pay to certain laboratory personnel in the second quarter for their work during the COVID-19 pandemic. Such increased pay was not provided in the third or fourth quarters, but we may decide to resume increased pay in the future. The previous shelter-in-place order and current reopening and health orders have negatively impacted productivity, disrupted our business, and slowed research and development activities due to us limiting access to our laboratory space that would otherwise be used by our research and development group, and, to the extent such orders remain in place, they may continue to cause such effects on our operations. The reopening and health orders may disrupt the ability of our suppliers to fulfill our purchase orders in a timely manner or at all. Additionally, we are aware of increased demand in the market for certain consumables used in COVID-19 test kits. We use such consumables in our operations, and we may face difficulties in acquiring such consumables if our suppliers prioritize orders related to COVID-19. Several of our customers, including the VA MVP, were delayed in sending us samples in the second and third quarters due to the inability to collect or ship samples during the
COVID-19 pandemic, and these and additional customers may be disrupted from collecting samples or sending purchase orders and samples to us in the future. Many of our customers, potential customers and potential partners have also put in place policies restricting visitors from other companies, and therefore our sales team and members of management have been unable to meet such parties in person, which may result in reduced acquisition of new customers, fewer orders from existing customers, and fewer potential partnering opportunities. If our laboratory employees were to contract COVID-19, we may significantly curtail our laboratory operations or pause operations altogether until the imminent health risk to our employees subsided. Such disruptions in our operations, and our customers' and suppliers' operations, may continue to adversely affect revenues and operating results.
The global COVID-19 pandemic continues to rapidly evolve and to present serious health risks. While authorities in some areas have lifted or relaxed certain of the restrictions described above, in some cases they have subsequently re-imposed various restrictions after observing an increased rate of COVID-19 cases; for example, in December 2020, state and local authorities in California reinstated shelter-in-place orders in light of the increasing rate of COVID-19 cases and shortage of intensive care unit beds across the state. Furthermore, there is no guarantee when or if all such restrictions will be eliminated, such that we and our customers, manufacturers and suppliers will be able to safely resume operations consistent with our pre-COVID-19 operations. Vaccines against COVID-19 have been approved by the FDA and other regulatory authorities, but there is uncertainty as to when these vaccines will be widely available to our employees and the population at large and how quickly and to what extent the vaccines will impact the COVID-19 pandemic.
While the extent of the impact of the current COVID-19 pandemic on our business and financial results is uncertain, a continued and prolonged public health crisis such as the COVID-19 pandemic could have a material negative impact on our business, financial condition, and operating results.
Factors Affecting Our Performance
We believe there are several important factors that have impacted, and that we expect will continue to impact, our operating performance and results of operations, including:
The continued development of the market for genomic-based tests. Our performance depends on the willingness of biopharmaceutical customers to continue to seek more comprehensive molecular information to develop more efficacious cancer therapies.
Increasing adoption of our products and solutions by existing customers. Our performance depends on our ability to retain and broaden adoption with existing customers. Because our technology is novel, some customers begin using our platform by initiating pilot studies involving a small number of samples to gain experience with our service. As a result, historically a significant portion of our revenues has come from existing customers. We believe that our ability to convert initial pilots into larger orders from existing customers has the potential to drive substantial long-term revenue. We expect there may be some variation in the number of samples they choose to test each quarter.
Adoption of our products and solutions by new customers. While new customers initially may not account for significant revenues, we believe that they have the potential to grow substantially over the long term as they gain confidence in our service. Our ability to engage new customers is critical to our long-term success. Our publications, posters and presentations at scientific conferences lead to engagement at the scientific level with potential customers who often make the initial decision to gain experience with our platform. Accessing these new customers through scientific engagement and marketing to gain initial buy-in is critical to our success and gives us the opportunity to demonstrate the utility of our platform.
Our revenues and costs are affected by the volume of samples we receive from customers from period to period. The timing and size of sample shipments received after orders have been placed is variable. Since sample shipments can be large, and are often received from a third party, the timing of arrival can be difficult to predict over the short term. Although our long-term performance is not affected, we do see quarter-to-quarter volatility due to these factors. Samples arriving later than expected may not be processed in the quarter proposed and result in revenue the following quarter. Since many of our customers request defined turnaround times, we employ project managers to coordinate and manage the complex process from sample receipt to sequencing and delivery of results.
Investment in product innovation to support commercial growth. Investment in research and development, including the development of new products and capabilities is critical to establish and maintain our leading position. We have invested significantly in our NeXT Platform, introducing two new products and additional capabilities in 2020 alone:
Components of Operating Results
We derive our revenues primarily from sequencing and data analysis services to support the development of next-generation cancer therapies and to support large-scale genetic research programs. We support our customers by providing high-accuracy, validated genomic sequencing and advanced analytics. Many of these analytics are related to state-of-the-art biomarkers, including those relevant to immuno-oncology therapeutics such as checkpoint inhibitors.
Our revenues are primarily generated through contracts with companies in the pharmaceutical industry, healthcare organizations, and government entities. Our ability to increase our revenues will depend on our ability to further penetrate this market. To do this, we are developing a growing set of state-of-the-art products, advancing our operational infrastructure, expanding our international presence, building our regulatory credentials, and expanding our targeted marketing efforts. Unlike diagnostic or therapeutic companies, we have not to date sought reimbursement through traditional healthcare payors. We sell through a small direct sales force.
We derive a substantial portion of our current and expected future revenues from sales of our DNA sequencing and data analysis services to the VA MVP. Our contract with the VA MVP does not include specific testing turnaround times. Therefore, we have the ability to modulate the volume of samples processed for the VA MVP up or down to complement sample volumes from all other customers, which can vary from period to period.
We have one reportable segment from the sale of sequencing and data analysis services. Substantially all of our revenues to date have been derived from sales in the United States.
Costs and Expenses
Costs of revenues
Costs of revenues consist of raw materials costs, personnel costs (salaries, bonuses, stock-based compensation, payroll taxes, and benefits), laboratory supplies and consumables, depreciation and maintenance on equipment, and allocated facilities and information technology ("IT") costs. We expect costs of revenues to increase as our revenues grow, and in the short term costs of revenues may outpace revenue growth as we invest in expanding our laboratory capacity, but over time the cost per sample processed is expected to decrease due to economies of scale we may gain as volume increases, automation initiatives, and other cost reductions.
Research and development expenses
Research and development expenses consist of costs incurred for the research and development of our products. These expenses consist primarily of personnel costs (salaries, bonuses, stock-based compensation, payroll taxes, and benefits), laboratory supplies and consumables, costs of purchasing samples for research purposes, depreciation and maintenance on equipment, and allocated facilities and IT costs. We include in research and development expenses the costs to further develop software we use to operate our laboratory, analyze the data it generates, and automate our operations. These expenses also include costs associated with our collaborations, which we expect to increase over time.
We expense our research and development expenses in the period in which they are incurred. We expect to increase our research and development expenses as we continue to develop new products.
Selling, general, and administrative expenses
Selling expenses consist of personnel costs (salaries, commissions, bonuses, stock-based compensation, payroll taxes, and benefits), customer support expenses, direct marketing expenses, and market research. Our general and administrative expenses include costs for our executive, accounting, finance, legal, and human resources functions. These expenses consist of personnel costs (salaries, bonuses, stock-based compensation, payroll taxes, and benefits), corporate insurance, audit and legal expenses, consulting costs, and allocated facilities and IT costs. We expense all selling, general and administrative expenses as incurred.
We expect our selling expenses will continue to increase in absolute dollars, primarily driven by our efforts to expand our commercial capability and to expand our brand awareness and customer base through targeted marketing initiatives with an increased presence both within and outside the United States. We also expect general and administrative expenses to increase as we scale our operations.
Interest income consists primarily of interest earned on our cash and cash equivalents and short-term investments. Interest income increased significantly beginning in the second half of 2019 as a result of us investing proceeds from the initial public offering of our common stock in June 2019 (our "IPO"). More recently, interest income has been adversely impacted by recent declines in yields on debt securities. We expect that our interest income will continue to decline in the near future as the decline in yields is expected to more than offset the increased investments balances after our August 2020 and January 2021 follow-on offerings.
Previously, interest expense primarily consisted of cash and non-cash interest costs related to our term loan, convertible promissory notes, revolving loan and security agreement (the "Revolving Loan") with TriplePoint Capital LLC ("TriplePoint"), and growth capital loan (the "Growth Capital Loan") with TriplePoint. After the payoff of our Growth Capital Loan in August 2019, we no longer have any outstanding debt and have not incurred material interest expense from that point forward.
Loss on Debt Extinguishment
We incurred a loss on debt extinguishment in 2018 resulting from changes in the maturity dates of the convertible notes issued in 2017. We also incurred a loss on debt extinguishment in 2019 upon the payoff of the Growth Capital Loan. See Note 6 to our consolidated financial statements included elsewhere in this annual report.
Other Income (Expense), Net
Other income (expense), net consists primarily of foreign currency exchange gains and losses. In 2019, other income (expense), net also consisted of changes in fair value of convertible preferred stock warrant liability. Due to the conversion of convertible preferred stock warrants to common stock warrants upon our IPO, changes in fair value of such warrants are no longer recorded through income since our IPO. See Note 10 to our consolidated financial statements included elsewhere in this annual report for further discussion of this item. We expect our foreign currency gains and losses to continue to fluctuate in the future due to changes in foreign currency exchange rates.
Trend Financial Information The following selected consolidated financial data should be read in conjunction with the consolidated financial statements and the notes thereto in Item 8 of Part II, "Financial Statements and Supplementary Data". Historical results are not necessarily indicative of future results. Year Ended December 31, 2020 2019 2018 2017 Consolidated Statements of Operations: (in thousands, except share and per share data) Revenues $ 78,648 $ 65,207 $ 37,774 $ 9,393 Costs and expenses Costs of revenues 58,534 43,127 25,969 11,736 Research and development 28,568 22,418 14,304 9,919 Selling, general and administrative 33,692 22,080 11,271 9,901 Total costs and expenses 120,794 87,625 51,544 31,556 Loss from operations (42,146 ) (22,418 ) (13,770 ) (22,163 ) Interest income 949 1,620 293 100 Interest expense (2 ) (1,133 ) (1,894 ) (1,303 ) Loss on debt extinguishment - (1,704 ) (4,658 ) - Other (expense) income, net (24 ) (1,440 ) 150 (227 ) Loss before income taxes (41,223 ) (25,075 ) (19,879 ) (23,593 ) Provision for income taxes (57 ) (9 ) (7 ) (5 ) Net loss $ (41,280 ) $ (25,084 ) $ (19,886 ) $ (23,598 ) Net loss per share, basic and diluted $ (1.20 ) $ (1.39 ) $ (6.49 ) $ (7.78 ) Weighted-average shares outstanding, basic and diluted 34,374,903 18,011,470 3,063,157 3,031,636 December 31, 2020 2019 2018 2017 Consolidated Balance Sheet Data: (in thousands) Cash and cash equivalents, and short-term investments $ 203,290 $ 128,289 $ 19,744 $ 22,617 Working capital 180,083 89,616 (28,291 ) (22,262 ) Total assets 244,842 157,291 41,670 33,563 Total debt - - 4,996 17,506 Long-term obligations 9,261 639 804 1,183 Total liabilities 49,897 50,601 58,654 50,171 Redeemable convertible preferred stock - - 89,404 75,995 Total stockholders' equity (deficit) 194,945 106,690 (106,388 ) (92,603 )
Results of Operations
This section of this Annual Report on Form 10-K generally discusses 2020 and 2019 items and year-to-year comparisons between 2020 and 2019. Discussions of 2018 items and year-to-year comparisons between 2019 and 2018 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2019.
Revenues The following table shows revenues by customer type (in thousands): Years Ended December 31, Change 2020 2019 2018 2020 vs 2019 2019 vs 2018 VA MVP $ 56,154 $ 43,545 $ 18,601 29% 134% All other customers 22,494 21,662 19,173 4% 13% Total revenues $ 78,648 $ 65,207 $ 37,774 21% 73%
The following table shows concentration of revenues by customer:
Year Ended December 31, 2020 2019 2018 VA MVP 71% 67% 49% Pfizer Inc. * 13% 10% Merck & Co., Inc. * * 12%
The increase in revenues from the VA MVP in 2020 was driven by an increase in the volume of samples we tested in the period. This increase was driven by a significant rise in the number of samples we received from the VA MVP for testing during 2020 compared to those received for testing during 2019. Our increasingly automated laboratory has supported this higher level of sample volumes.
All Other Customers
The increase in revenues from all other customers in 2020 was driven primarily by an increase in the volume of samples we tested in the period. Approximately $1.0 million of the increase was attributed to a new biobank customer and $0.65 million of the increase in revenues was related to the completion of a research collaboration with a biopharmaceutical customer in the gene therapy space. Approximately one-third of total revenues from all other customers were derived from our NeXT Platform products, whereas revenues from NeXT products in 2019 were insignificant.
Costs and Expenses Year Ended December 31, Change 2020 2019 2018 2020 vs 2019 2019 vs 2018 (in thousands) Costs of revenues $ 58,534 $ 43,127 $ 25,969 36% 66% Research and development 28,568 22,418 14,304 27% 57% Selling, general and administrative 33,692 22,080 11,271 53% 96% Total costs and expenses $ 120,794 $ 87,625 $ 51,544 38% 70%
Costs of revenues
The increase in costs of revenues in 2020 was primarily due to the increase in revenue volume, including from the VA MVP, discussed above. The cost components related to the increase in costs of revenues were a $10.3 million increase in raw materials due primarily to higher VA MVP sample volumes; a $2.3 million increase related to personnel-related costs; a $0.9 million increase in depreciation and maintenance costs due to our additions of laboratory equipment; a $0.8 million increase in the cost of laboratory supplies and consumables; a $0.6 million increase in IT and facility costs; and a $0.5 million increase in other costs. Costs of revenues increased more than revenues primarily due to . . .
Feb 25, 2021
Is there a problem with this press release? Contact the source provider Comtex at firstname.lastname@example.org. You can also contact MarketWatch Customer Service via our Customer Center.
(c) 1995-2021 Cybernet Data Systems, Inc. All Rights Reserved