Personalis, Inc. — Q2 2022 Form 10-Q Summary
Business context and reporting period
Personalis provides advanced genetic testing for cancer and sequencing/data-analysis services for pharmaceutical, biopharmaceutical, academic, nonprofit and government customers. The company operates as one reportable segment. This unaudited Form 10-Q covers the three and six months ended June 30, 2022, filed August 3, 2022.
Personalis continued investing in NeXT Personal, NeXT Dx and its clinical diagnostics infrastructure, including a planned relocation and laboratory expansion into a 100,000-square-foot Fremont facility. NeXT Personal remained research-use-only and had not yet been validated as a laboratory-developed test.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $18.2 million | $21.7 million | $33.5 million | $42.6 million |
| Gross profit | $4.3 million | $8.2 million | $8.6 million | $15.6 million |
| Gross margin | 23.5% | 37.7% | 25.6% | 36.7% |
| Loss from operations | $(27.9) million | $(14.9) million | $(56.2) million | $(27.4) million |
| Operating margin | (152.9)% | (69.0)% | (167.9)% | (64.5)% |
| Net loss | $(27.5) million | $(15.0) million | $(55.8) million | $(27.4) million |
| Basic and diluted loss per share | $(0.60) | $(0.34) | $(1.23) | $(0.63) |
- Revenue from the VA Million Veteran Program declined 70% year over year in Q2 and 72% for the six-month period. Revenue from all other customers increased 74% in Q2 and 64% year to date, primarily due to higher Natera sample volumes.
- Research and development expense increased 39% in Q2 and 58% year to date; selling, general and administrative expense increased 39% and 44%, respectively. Cost of revenue increased 3% in Q2 despite lower revenue, reflecting higher fixed laboratory, labor, equipment and facilities costs.
- Cash and cash equivalents were $86.7 million and short-term investments were $146.8 million at June 30, 2022, for total cash and short-term investments of $233.5 million. Working capital was $218.5 million.
- Operating cash flow was $(38.7) million for the first six months, compared with $(37.7) million in the prior-year period. Investing cash flow was $19.9 million, including investment maturities and $5.5 million of Fremont lease incentive receipts, partially offset by $18.9 million of capital expenditures.
- Total debt was $1.7 million, consisting of the current carrying value of equipment and software financing. Operating lease liabilities totaled $56.5 million, including $82.7 million of undiscounted future minimum lease payments.
- Stock-based compensation expense was $4.4 million in Q2 and $9.2 million year to date.
Material changes versus the prior comparable period
- Total revenue declined 16% in Q2 and 21% for the first six months, driven by lower VA MVP sample volumes.
- Natera represented 38% of Q2 revenue and 33% of six-month revenue. Revenue from the NeXT Platform, including Natera, increased to $10.9 million in Q2 from $5.0 million and to $18.7 million year to date from $9.3 million.
- Gross margin contracted materially because of lower revenue and higher fixed laboratory costs, as well as a less favorable cost structure for Natera and pharmaceutical customer work compared with VA MVP orders.
- Operating losses approximately doubled in Q2 and more than doubled for the first six months, reflecting increased investment in product development, clinical validation, commercial personnel, facilities and infrastructure.
- Property and equipment, net, increased to $47.6 million from $19.7 million at December 31, 2021, primarily reflecting facility and laboratory expansion.
- The company’s accumulated deficit increased to $302.9 million from $247.1 million at year-end 2021.
Guidance, outlook, risks and unusual items
- Management stated that cash, cash equivalents and short-term investments, together with anticipated operating cash flows, were expected to fund near-term capital and operating needs for at least the next 12 months. The company nevertheless may need additional equity, convertible debt or other financing if cash use exceeds expectations.
- Personalis expected 2022 capital expenditures of $45 million to $50 million, including $30 million to $35 million of Fremont-related costs net of expected landlord reimbursements. It expected capital expenditures of $7 million to $10 million in each of the following two years.
- The company had fulfilled all orders received under the existing VA MVP contract. Future material VA MVP revenue depended on a new task order or contract, which had not been awarded and might not be issued. The most recent September 2021 order was $9.7 million, substantially below prior orders.
- Clinical diagnostics expansion depended on completing validation, regulatory and reimbursement activities. Management anticipated NeXT Dx revenue in the second half of 2022 and a potential favorable MolDx reimbursement decision in early 2023; these expectations were not assured.
- Key risks include continued operating losses, dependence on Natera and VA MVP, sample-volume volatility, reliance on limited or sole-source suppliers such as Illumina, laboratory and facility expansion risk, COVID-19 and supply-chain disruption, regulatory and reimbursement uncertainty, cybersecurity and privacy exposure, competition, and the need for future financing.
- On August 2, 2022, Personalis filed a patent infringement complaint against Foresight Diagnostics in federal court. The company sought injunctive relief, damages and costs, but stated that the outcome and financial effect could not yet be estimated.
- On August 2, 2022, the board appointed Lonnie Shoff as an independent Class II director and compensation committee member.
- Management reported effective disclosure controls and procedures as of June 30, 2022 and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Personalis obtains a new VA MVP contract, its timing, scope and value, and the resulting impact on revenue and cash burn.
- Whether Natera sample volumes remain elevated and whether the non-exclusive relationship creates customer concentration or pricing risk.
- Progress toward NeXT Dx validation, clinical launch, reimbursement and any regulatory approvals or laboratory licenses required for the Fremont facility.
- Actual 2022 capital expenditures, Fremont construction costs, lease incentives and the effect of the expanded facility on gross margins and operating expenses.
- Cash runway under current operating losses and the likelihood, terms and dilution of any future financing.
- Developments in the Foresight patent litigation, including legal costs, potential injunctions, damages or settlement exposure.
- Supply continuity and pricing arrangements for Illumina sequencers, reagents and other critical laboratory materials.