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Nov. 5, 2020, 4:22 p.m. EST

10-Q: PERSONALIS, INC.

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(EDGAR Online via COMTEX) -- Item 2. 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 condensed consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 filed with the Securities and Exchange Commission (the "SEC") on March 25, 2020 (the "Annual Report"). 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 II, 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 Quarterly Report on Form 10-Q and in our Annual Report.

Overview

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 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 to date from the VA MVP has increased to approximately $175 million.

In August 2020, we launched 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 based on our NeXT Platform that we envision being used initially by both leading clinical cancer centers as well as biopharmaceutical companies.

On August 14, 2020, we completed a follow-on 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, of which $0.1 million was paid by September 30, 2020.

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 quarter, 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 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 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 scope and duration of such impact is highly uncertain. We are unable to predict or quantify the impact of any potential disruption to our supply chain, changes in consumer demand or any other actions that may become necessary as events unfold. In response to this uncertainty, the COVID-19 Advisory Committee of our board of directors was formed in March 2020 and is responsible for advising management on the unique risks to our business, operations, employees, facilities and financial condition related to the COVID-19 pandemic and overseeing our plans and initiatives to respond to and mitigate the risks presented by the pandemic.

Components of Operating Results

Revenues

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 additional 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 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 production material costs, personnel costs (salaries, bonuses, benefits, and stock-based compensation), costs of consumables, laboratory supplies, depreciation and service maintenance on capitalized equipment, and information technology ("IT") and facility costs. We expect costs of revenues to increase as our revenues grow, and in the short term costs of revenues may outpace revenues 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 development of our products. These expenses consist primarily of payroll and personnel costs (salaries, bonuses, benefits, and stock-based compensation), costs of consumables, laboratory supplies, depreciation and service maintenance on capitalized equipment, and IT and facilities costs. 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, customer support expenses, direct marketing expenses, educational and promotional 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, audit and legal expenses, consulting costs, and IT and facility 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

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 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 future as the decline in yields is expected to more than offset the increased investments balances after our August 2020 follow-on offering.

Interest Expense

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.

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 included elsewhere in this Quarterly Report on Form 10-Q 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.







        Results of Operations
        The following sets forth, for the periods presented, our unaudited condensed
        consolidated statements of operations (in thousands, except share and per share
        data):
                                                        Three Months Ended                 Nine Months Ended
                                                           September 30,                     September 30,
                                                       2020             2019             2020             2019
        Revenues                                   $     19,816     $     17,153     $     58,472     $     47,053
        Costs and expenses
        Costs of revenues                                14,483           11,524           44,428           31,538
        Research and development                          7,193            5,303           20,048           15,045
        Selling, general and administrative               7,793            6,056           22,772           15,692
        Total costs and expenses                         29,469           22,883           87,248           62,275
        Loss from operations                             (9,653 )         (5,730 )        (28,776 )        (15,222 )
        Interest income                                     117              756              873            1,040
        Interest expense                                      -             (204 )             (2 )         (1,133 )
        Loss on debt extinguishment                           -           (1,704 )              -           (1,704 )
        Other income (expense), net                          (4 )             (2 )              5           (1,415 )
        Loss before income taxes                         (9,540 )         (6,884 )        (27,900 )        (18,434 )
        Provision for income taxes                           (5 )             (1 )            (39 )             (5 )
        Net loss                                   $     (9,545 )   $     (6,885 )   $    (27,939 )   $    (18,439 )
        Net loss per share, basic and diluted      $      (0.27 )   $      (0.22 )   $      (0.85 )   $      (1.35 )
        Weighted-average shares outstanding,
        basic and diluted                            35,460,092       31,133,683       32,845,583       13,613,444
        








        Revenues
        The following table shows revenues by customer type (in thousands):
                                        Three Months Ended                            Nine Months Ended
                                           September 30,             Change             September 30,             Change
                                       2020            2019                         2020            2019
        VA MVP                       $  14,092       $  12,912         9%         $  43,598       $  29,791        46%
        All other customers              5,724           4,241        35%            14,874          17,262       (14)%
        Total revenues               $  19,816       $  17,153        16%         $  58,472       $  47,053        24%
        


The following table shows concentration of revenues by customer:







                                                        Three Months Ended September 30,                 Nine Months Ended September 30,
                                                        2020                         2019               2020                         2019
        VA MVP                                          71%                          75%                75%                          63%
        Pfizer Inc.                                      *                           11%                 *                           17%
        


VA MVP

The increase in revenues from the VA MVP during the third quarter and first nine months of 2020 was driven by an increase in the volume of samples we tested in each such period. This increase was driven by a significant rise in the number of samples we received from the VA MVP since the start of 2019. Our increasingly automated laboratory has supported this higher level of sample volumes.

All Other Customers

The increase in revenues from all other customers during the third quarter of 2020 was driven primarily by an increase in the volume of samples we tested in the period. The increased sample volumes were primarily from large pharmaceutical customers we are partnering with on retrospective clinical trials. Approximately $0.5 million of the increase in revenues was related to the completion of a research collaboration with a biopharmaceutical customer in the gene therapy space that is not expected to occur in future periods.

The decrease in revenues from all other customers during the first nine months of 2020 was driven by a decrease in the volume of samples we tested in the period. This was due to the receipt of relatively large orders for specific projects from pharmaceutical customers in early 2018 that were fulfilled beginning around the second quarter of 2018 through the second quarter of 2019, and did not recur due to transitioning customers from our ACE platform to the ImmunoID NeXT platform. Decreases in revenue recognized from large pharmaceutical companies partnering with us on retrospective clinical trials accounted for most of the decrease, partially offset by $0.65 million of revenues related to the completion of a research collaboration with a biopharmaceutical customer in the gene therapy space that is not expected to occur in future periods.







        Costs and Expenses
                                        Three Months Ended                            Nine Months Ended
                                           September 30,             Change             September 30,             Change
                                       2020            2019                         2020            2019
                                          (in thousands)                               (in thousands)
        Costs of revenues            $  14,483       $  11,524        26%         $  44,428       $  31,538        41%
        Research and development         7,193           5,303        36%            20,048          15,045        33%
        Selling, general and
        administrative                   7,793           6,056        29%            22,772          15,692        45%
        Total costs and expenses     $  29,469       $  22,883        29%         $  87,248       $  62,275        40%
        


Costs of Revenues

The increase in the third quarter of 2020 was primarily due to the increase in revenues discussed above. The cost components related to the increase in costs of revenues were a $1.7 million increase in production materials; a $0.8 million increase related to personnel-related costs including salaries, bonuses, benefits, and stock-based compensation expense in connection with raising our testing capacity; a $0.3 million increase in depreciation and maintenance due to our additions of laboratory equipment; and a $0.1 million increase in IT and facility costs.

The increase in the first nine months of 2020 was primarily due to the increase in revenues discussed above. The cost components related to the increase in costs of revenues were a $9.1 million increase in production materials due primarily to higher VA MVP sample volumes; a $1.9 million increase related to personnel-related costs including salaries, bonuses, benefits, and stock-based compensation expense in connection with raising our testing capacity (including approximately $0.2 million related to temporary increased pay to certain laboratory personnel in the second quarter for their work during the COVID-19 pandemic, which did not repeat in the third quarter); a $0.7 million increase in depreciation and maintenance costs due to our additions of laboratory equipment; a $0.6 million increase in IT and facility costs; a $0.4 million increase in the cost of consumables and laboratory supplies; and a $0.2 million increase in other costs.

Research and Development

The increase in the third quarter of 2020 was primarily due to development of new products and lab automation efforts, and consisted of an increase of $1.5 million in personnel-related costs, including salaries, bonuses, benefits, and stock-based compensation expense; a $0.3 million increase in IT and facilities costs; and a $0.1 million increase in laboratory supplies costs.

The increase in the first nine months of 2020 was primarily due to development of new products and lab automation efforts, and consisted of an increase of $4.1 million in personnel-related costs, including salaries, bonuses, benefits, and stock-based compensation expense; a $0.6 million increase in IT and facilities costs; and a $0.3 million increase in laboratory supplies costs.

Selling, General and Administrative

The increase in the third quarter of 2020 was primarily due to a $1.6 million increase in personnel-related costs including salaries, bonuses, benefits, and stock-based compensation expense primarily related to increased headcount to support expansion of our commercial team.

The increase in the first nine months of 2020 was due to a $4.9 million increase in personnel-related costs including salaries, bonuses, benefits, and stock-based compensation expense primarily related to increased headcount to support expansion of our commercial team; and a $2.2 million increase in professional services primarily related to public company-related costs (including corporate insurance, audit fees, and legal expenses).

Interest Income, Interest Expense, Loss on Debt Extinguishment, and Other Income (Expense), Net







                                            Three Months Ended
                                               September 30,               Change        Nine Months Ended September 30,      Change
                                          2020                2019                           2020                2019
                                              (in thousands)                                     (in thousands)
        Interest income               $        117         $      756           (85 )%   $        873         $    1,040           (16 )%
        Interest expense                         -               (204 )                            (2 )           (1,133 )
        Loss on debt extinguishment              -             (1,704 )                             -             (1,704 )
        Other income (expense), net             (4 )               (2 )                             5             (1,415 )
        Total                         $        113         $   (1,154 )                  $        876         $   (3,212 )
        


Interest Income

The decreases in the third quarter and first nine months of 2020 were driven by declines in yields on debt securities beginning around the second quarter of 2020, partially offset by higher average cash and investment balances subsequent to our IPO in June 2019 and follow-on offering in August 2020.

Interest Expense

The third quarter of 2019 included cash and non-cash interest expense related primarily to the Growth Capital Loan, while the nine-month period ended September 30, 2019 also included cash and non-cash interest expense related to the Revolving Loan, which was paid off in late March 2019 with proceeds from the Growth Capital Loan. Since the repayment of the Growth Capital Loan in August 2019, we have had no outstanding debt and therefore did not incur significant interest expense in 2020.

Loss on Debt Extinguishment

During the third quarter of 2019, the Company recorded a $1.7 million loss on extinguishment of debt as a result of the repayment of the Growth Capital Loan in its entirety.

Other Income (Expense), Net

Other expense in the nine months ended September 30, 2019 was primarily comprised of increases in the fair values of warrants for Series B and Series C redeemable convertible preferred stock as a result of increases to the estimated fair value of our equity during the period. Other income in 2020 was primarily comprised of foreign currency remeasurements.







        Liquidity and Capital Resources
        The following tables present selected financial information and statistics as of
        and for the nine months ended September 30, 2020 and 2019 (in thousands):
                                                                     As of September 30,
                                                                      2020          2019
           Cash and cash equivalents, and short-term investments   $  206,063     $ 127,276
           Property and equipment, net                                 12,735        15,215
           Contract liabilities                                        20,593        33,726
           Working capital                                            187,689        92,909
                                                         Nine Months Ended September 30,
                                                           2020                   2019
         Net cash used in operating activities       $        (40,121 )     $        (20,474 )
         Net cash used in investing activities                 (2,003 )              (46,731 )
         Net cash provided by financing activities            120,327                134,477
        


From our inception through September 30, 2020, we have funded our operations primarily from $144.0 million in net proceeds from our IPO in June 2019, $117.5 million in net proceeds from our follow-on offering in August 2020, and $89.6 million from issuance of redeemable convertible preferred stock, as well as cash from operations and debt financing. On March 22, 2019, we received $20.0 million in gross cash proceeds from the Growth Capital Loan. As of September 30, 2020, we had cash and cash equivalents in the amount of $133.2 million and short-term investments in the amount of $72.8 million.

We have incurred net losses since our inception. We anticipate that our current cash and cash equivalents and short-term investments, together with cash provided by operating activities, are sufficient to fund our near-term capital and operating needs for at least the next 12 months.

We have based these future funding requirements on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect. If our available cash balances, net proceeds from the offerings and anticipated cash flow from operations are insufficient to satisfy our liquidity requirements, including because of lower demand for our services or other risks described in this Quarterly Report on Form 10-Q, such as the COVID-19 pandemic, we may seek to sell additional common or preferred equity or convertible debt securities, enter into an additional credit facility or another form of third-party funding or seek other debt financing. The sale of equity and convertible debt securities may result in dilution to our stockholders and, in the case of preferred equity securities or convertible debt, those securities could provide for rights, preferences or privileges senior to those of our common stock. The terms of debt securities issued or borrowings pursuant to a credit agreement could impose significant restrictions on our operations. Additional capital may not be available on reasonable terms, or at all.

On March 22, 2019, we entered into the Growth Capital Loan with TriplePoint to provide for a $20.0 million growth capital loan facility and drew down the full $20.0 million available under the facility. We used $5.1 million of the Growth . . .

Nov 05, 2020

COMTEX_374008206/2041/2020-11-05T16:22:08

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