Personalis, Inc. — Q1 2020 Form 10-Q Summary
Business context and reporting period
Personalis is a cancer genomics company providing sequencing and data-analysis services for cancer-therapy development and population-sequencing programs. The company operates as one reportable segment. This unaudited Form 10-Q covers the three months ended March 31, 2020, compared with the three months ended March 31, 2019.
Population sequencing, primarily through the U.S. Department of Veterans Affairs Million Veteran Program (VA MVP), represented the majority of revenue. The company also develops its NeXT Platform, liquid-biopsy capabilities, and diagnostic applications.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $19.2 million | $14.1 million | +36% |
| Gross profit | $4.0 million | $4.0 million | Approximately flat |
| Gross margin | 21.1% | 28.3% | Down 7.2 percentage points |
| Loss from operations | $(9.6) million | $(5.4) million | Loss increased |
| Operating margin | (50.2%) | (38.6%) | Lower |
| Net loss | $(9.1) million | $(5.7) million | Loss increased |
| Basic and diluted loss per share | $(0.29) | $(1.84) | Improved due primarily to higher share count |
| Net cash used in operating activities | $(8.6) million | $0.1 million provided | Material deterioration |
Costs of revenues increased 50% to $15.1 million, research and development increased 22% to $6.4 million, and selling, general and administrative expenses increased 74% to $7.3 million. Higher production materials, personnel, depreciation, facility, information-technology, professional-service, and public-company costs contributed to the increases. Interest income rose to $0.5 million from $0.1 million following the 2019 IPO, while interest expense declined to immaterial levels because all debt had been repaid.
As of March 31, 2020, cash and cash equivalents were $46.7 million and short-term investments were $73.3 million, for total cash and investments of approximately $120.0 million. Working capital was $83.3 million. The company had no outstanding borrowings and stated that existing cash, investments, and expected operating cash flows should fund operations for at least the next 12 months, subject to assumptions that could prove incorrect.
Total assets were $151.9 million, total liabilities were $52.7 million, and stockholders’ equity was $99.2 million. Contract liabilities were $34.4 million, including customer deposits and deferred revenue. Contracted revenue not yet recognized was $54.0 million, which the company expected to recognize over the following 12 months.
Material changes versus the prior comparable period
- Revenue increased 36%, driven by a 77% increase in VA MVP revenue to $14.8 million. VA MVP revenue represented 77% of total revenue versus 59% in Q1 2019.
- Revenue from all other customers declined 23% to $4.4 million, primarily because of lower sample volumes following the completion of large pharmaceutical orders.
- Costs and expenses increased 48%, outpacing revenue growth and contributing to a larger operating loss and lower gross margin.
- Operating cash flow changed from $0.1 million provided to $8.6 million used, reflecting the larger net loss and unfavorable working-capital movements, including increases in accounts receivable and inventory and deferred costs.
- The company had no debt at March 31, 2020 after repaying its growth capital loan in August 2019. Q1 2019 included debt-related financing activity and interest expense.
- Cash and investments increased substantially versus March 31, 2019, primarily because of the $139.8 million of net IPO proceeds received in June 2019.
- Stock-based compensation increased to $1.2 million from $0.6 million. The company granted a 421,000-share performance-based option to its CEO and issued additional options and restricted stock units.
Guidance, outlook, commentary, risks, and unusual items
The company did not provide specific revenue or earnings guidance. Management expects continued investment in research and development, sales and marketing, infrastructure, automation, and laboratory capacity, and expects losses for the foreseeable future. It expects capital expenditures to increase later in 2020 after a temporary slowdown associated with COVID-19 uncertainty.
COVID-19 materially affected operating conditions. Shelter-in-place orders in the San Francisco Bay Area led to substantially closed offices, limited laboratory access, remote work, delayed customer samples, potential supplier disruptions, and restrictions on in-person sales activity. The company prioritized time-sensitive healthcare projects and stated that the scope and duration of the pandemic’s financial impact could not be predicted.
- Customer concentration: VA MVP accounted for 77% of Q1 revenue, and the top five customers accounted for 92%. VA MVP orders depend on government funding, veteran enrollment, sample volumes, pricing, and continued demand; the contract may be terminated for convenience.
- Prepayment exposure: Contract liabilities included approximately $34.4 million of customer deposits, including $30.6 million from one customer. Cancellations or reductions in expected services could require repayment.
- Supplier concentration: The company relies on limited or sole-source suppliers, including Illumina for sequencers, reagents, maintenance, and related technology.
- Regulatory risk: The company markets its tests as laboratory-developed tests subject to CLIA and FDA enforcement-discretion policies. Changes in FDA, CLIA, state, foreign, privacy, or healthcare regulations could increase costs or restrict operations.
- Operating risk: The company relies on a single primary laboratory in Menlo Park, California, and faces risks from facility disruption, supply interruptions, information-technology failures, cybersecurity incidents, data privacy requirements, and difficulty hiring specialized personnel.
- Profitability and financing: The company has incurred losses since inception, had an accumulated deficit of $149.7 million, and may need additional financing if cash resources or demand are lower than expected.
- Unusual subsequent events: In April 2020, the company extended its laboratory and office lease through November 2027, adding $14.8 million of future minimum payments beginning December 2020, and expanded its data-center space.
Management stated that disclosure controls and procedures were effective as of March 31, 2020 and that there were no material changes in internal control over financial reporting during the quarter. No material legal proceedings were reported.
Most important facts for investors to verify
- Whether VA MVP funding, sample volumes, pricing, and contract renewals support the current revenue level and backlog.
- Whether non-VA customer revenue stabilizes or continues to decline.
- Whether gross margin can recover from 21.1% as laboratory volume, automation, and product mix change.
- Whether the $120.0 million cash-and-investment balance is sufficient under prolonged COVID-19 disruption and continued operating losses.
- The potential timing and amount of refunds related to the $34.4 million of customer deposits.
- The effect of the April 2020 lease amendments on future fixed costs and liquidity.
- Regulatory developments affecting laboratory-developed tests, clinical diagnostics, genetic data privacy, and CLIA compliance.
- Exposure to Illumina and other concentrated suppliers, including the ability to maintain uninterrupted sequencing operations.