Personalis, Inc. — Q3 2020 Form 10-Q Summary
Business context and reporting period
Personalis provides cancer genomics, sequencing, and data-analysis services to pharmaceutical and biopharmaceutical companies, universities, nonprofits, and government entities. Population sequencing, particularly the U.S. Department of Veterans Affairs Million Veteran Program (VA MVP), represented the majority of revenue. The filing covers the three and nine months ended September 30, 2020, with comparisons to the corresponding 2019 periods.
- In September 2020, Personalis received a new VA MVP task order valued at up to approximately $31 million, increasing cumulative VA MVP task orders to approximately $175 million.
- In August 2020, the company launched a liquid biopsy assay covering approximately 20,000 human genes.
- The company announced a China partnership in June 2020 and formed a wholly owned Shanghai subsidiary in October 2020.
Financial results and key metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Revenue | $19.8 million | $17.2 million | $58.5 million | $47.1 million |
| Revenue growth | 16% | — | 24% | — |
| Gross profit | $5.3 million | $5.6 million | $14.0 million | $15.5 million |
| Gross margin | 26.9% | 32.8% | 24.0% | 33.0% |
| Loss from operations | $(9.7) million | $(5.7) million | $(28.8) million | $(15.2) million |
| Operating margin | (48.7)% | (33.4)% | (49.2)% | (32.4)% |
| Net loss | $(9.5) million | $(6.9) million | $(27.9) million | $(18.4) million |
| Net loss per share | $(0.27) | $(0.22) | $(0.85) | $(1.35) |
- VA MVP revenue increased 9% to $14.1 million in Q3 and 46% to $43.6 million for the first nine months. VA MVP represented 71% of Q3 revenue and 75% of nine-month revenue.
- Revenue from all other customers increased 35% in Q3 to $5.7 million but declined 14% for the first nine months to $14.9 million. The filing attributes the nine-month decline primarily to nonrecurring large pharmaceutical projects and platform transitions.
- Costs of revenues increased 26% in Q3 and 41% for the first nine months, outpacing revenue growth and reducing gross margins.
- Research and development expense increased 36% in Q3 and 33% for the first nine months, driven by new product development and laboratory automation.
- Selling, general and administrative expense increased 29% in Q3 and 45% for the first nine months, primarily from higher personnel costs and public-company expenses.
- Stock-based compensation was $1.7 million in Q3 and $4.8 million for the first nine months, compared with $1.4 million and $3.7 million, respectively, in 2019.
Cash flow, liquidity, debt, and balance sheet
- Cash and cash equivalents were $133.2 million at September 30, 2020, compared with $55.0 million at December 31, 2019.
- Short-term investments were $72.8 million, resulting in cash, cash equivalents, and short-term investments of $206.1 million.
- Working capital was $187.7 million, compared with $92.9 million at September 30, 2019.
- Operating cash flow was $(40.1) million for the first nine months, compared with $(20.5) million in the prior-year period.
- Investing cash flow was $(2.0) million, including $2.4 million of capital expenditures. Management expects full-year 2020 capital expenditures to be lower than 2019.
- Financing cash flow was $120.3 million, primarily reflecting $117.5 million of net proceeds from the August 2020 follow-on offering.
- The company had no outstanding debt at September 30, 2020. It repaid the Growth Capital Loan in August 2019.
- Contract liabilities, primarily customer deposits, were $20.6 million, including approximately $17.6 million from one customer. Contracted revenue not yet recognized was $56.0 million, which the company expects to recognize within approximately four quarters.
- Management stated that existing cash, investments, and anticipated operating cash flows are expected to fund near-term capital and operating needs for at least the next 12 months, subject to the company’s assumptions and risks.
Material changes versus the prior comparable period
- Revenue growth was concentrated in VA MVP work; non-VA revenue declined for the first nine months.
- Operating losses widened substantially as costs and expenses grew faster than revenue.
- Gross margin declined by approximately 6 percentage points in both the quarter and nine-month period.
- Operating cash use nearly doubled year over year, while the company’s liquidity strengthened because of the $117.5 million follow-on equity offering.
- Interest expense and debt-related charges largely disappeared in 2020 following the 2019 debt repayment, but interest income declined because of lower yields on investments.
- Shares outstanding increased materially following the follow-on offering: 38.8 million shares were outstanding at September 30, 2020 versus 31.2 million at December 31, 2019.
Guidance, outlook, management commentary, risks, and unusual items
- The filing does not provide formal revenue, earnings, or margin guidance.
- Management expects continued investment in laboratory capacity, automation, research and development, sales, marketing, and international expansion, and expects losses for the foreseeable future.
- COVID-19 restricted office and laboratory access, slowed research and development, delayed customer sample deliveries, and created potential supply-chain and staffing disruptions. The filing states that the ultimate impact cannot be predicted or quantified.
- Customer concentration is significant. The VA MVP accounted for 71% of Q3 revenue and 75% of nine-month revenue; the top five customers accounted for 85% and 88%, respectively. VA MVP orders are subject to funding, sample volumes, timing, and termination or reduction risk.
- Several sequencing instruments and reagents are sourced from limited or sole suppliers, including Illumina. The company’s relevant Illumina subcontractor agreement is scheduled to expire in August 2021, with pricing agreements expiring at various dates through December 2022.
- The company relies on customer deposits that may need to be refunded if customers cancel contracts or reduce expected service volumes.
- Regulatory risks include potential FDA oversight of laboratory-developed tests, CLIA and state laboratory licensing requirements, data privacy rules, and possible reimbursement challenges for future diagnostic products.
- Personalis reports no material legal proceedings, no off-balance-sheet arrangements, and effective disclosure controls as of September 30, 2020.
- A performance-based option for the CEO covering 421,000 shares vested in full after the reporting period when the company’s average market capitalization exceeded $1 billion for 30 calendar days. The resulting $1.2 million of previously unrecognized compensation cost was expected to be recognized in Q4 2020.
Important facts for investors to verify
- Whether VA MVP funding, task-order execution, sample volumes, and timing support continued revenue growth and reduce customer concentration over time.
- Whether revenue growth can outpace costs of revenues and operating expenses sufficiently to improve gross margins and reduce cash burn.
- The pace of operating cash usage and the duration of the company’s $206.1 million liquidity position under COVID-19, expansion, and demand scenarios.
- Potential customer-deposit refund obligations, particularly the approximately $17.6 million deposit from one customer.
- Renewal terms and continuity of Illumina supply, equipment, reagent, and maintenance arrangements.
- Regulatory developments affecting laboratory-developed tests, the NeXT Platform, liquid biopsy products, and any future in vitro diagnostic offerings.
- Execution and regulatory risks associated with the China expansion and the October 2020 Shanghai subsidiary.
- Share dilution from the follow-on offering, outstanding equity awards, and future capital-raising requirements.