Personalis, Inc. Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2019; filed August 13, 2019. Personalis is a cancer genomics company providing sequencing and data-analysis services, including its ImmunoID NeXT platform, to biopharmaceutical, government, academic, and other customers. The company operates as one reportable segment.
Key Financial Metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $15.8 million | $8.8 million | $29.9 million | $13.0 million |
| Gross profit | $5.9 million | $2.4 million | $9.9 million | $2.5 million |
| Gross margin | 37.3% | 27.2% | 33.1% | 19.2% |
| Loss from operations | $(4.1) million | $(3.7) million | $(9.5) million | $(8.9) million |
| Operating margin | (25.7%) | (42.1%) | (31.7%) | (68.4%) |
| Net loss | $(5.9) million | $(7.3) million | $(11.6) million | $(12.7) million |
| Net loss per share | $(0.89) | $(2.39) | $(2.38) | $(4.15) |
| Operating cash flow | Not separately disclosed | Not separately disclosed | $(10.8) million | $2.8 million |
Liquidity, Capitalization, and Cash Flow
- Cash and cash equivalents were $163.3 million at June 30, 2019, compared with $19.7 million at December 31, 2018. Approximately $160.4 million was held in money market funds.
- The June 2019 IPO generated approximately $140.0 million of net proceeds. Personalis issued 9,109,725 shares at $17.00 per share, including the underwriters’ overallotment.
- All outstanding redeemable convertible preferred stock converted into common stock in connection with the IPO. Preferred stock liabilities declined from $89.4 million at year-end 2018 to zero, and stockholders’ equity increased to $117.0 million from a deficit of $106.4 million.
- Net cash used in operating activities was $10.8 million for the six months, while capital expenditures used $2.8 million. Financing activities provided $157.2 million, principally from the IPO and $20.0 million of growth capital borrowings.
- Debt consisted principally of $20.0 million principal under the Growth Capital Loan, presented at $19.0 million net of debt discounts, with $1.0 million classified as current and $18.0 million long-term. Monthly interest-only payments are required through April 2020, followed by principal payments through March 2023.
- Management stated that existing cash and expected cash from operations should fund near-term operating and capital requirements for at least 12 months, but additional financing may eventually be required.
Material Changes Versus the Prior Comparable Period
- Revenue increased 80% in the quarter and 131% for the six-month period. VA Million Veteran Program revenue increased 115% in the quarter and 184% for the six months; all other customer revenue increased 51% and 86%, respectively.
- Revenue growth was attributed primarily to higher sample volumes. VA MVP represented 54% of quarterly revenue and 56% of six-month revenue.
- Gross margin improved substantially due to revenue growth and operating scale, although costs of revenues increased 55% in the quarter and 91% for the six months.
- Research and development expense increased 29% in the quarter and 51% for the six months as the company invested in new products, laboratory automation, IT, and facilities.
- Selling, general, and administrative expense increased 110% in the quarter and 96% for the six months, driven by personnel, professional services, and public-company costs.
- The company recorded $1.3 million of other expense in the quarter and $1.4 million for the six months, primarily from fair-value changes in preferred stock warrant liabilities. These liabilities were reclassified to equity upon conversion in the IPO.
- Contract liabilities, primarily customer deposits, were $41.9 million at June 30, 2019, including approximately $38.2 million from one customer. Remaining performance obligations expected to be recognized over more than one year were $57.4 million.
- Personalis adopted the new lease standard on January 1, 2019, recognizing a right-of-use asset and lease liabilities. It also adopted a new 2019 equity incentive plan and employee stock purchase plan in connection with becoming public.
Outlook, Risks, and Unusual Items
- No formal revenue or earnings guidance was provided in the filing. Management expects continued investment in laboratory capacity, infrastructure, sales and marketing, research and development, and potential diagnostic products; it also expects continued net losses for the foreseeable future.
- The company plans a full commercial launch of ImmunoID NeXT in 2019 and is developing a complementary liquid biopsy assay and a clinical diagnostic based on its platform.
- Customer concentration is significant: the top five customers represented 93% of quarterly revenue and 92% of six-month revenue. The VA MVP may terminate for convenience, and its funding, sample volumes, and demand are subject to change.
- Customer prepayments may be refundable if contracts are canceled or reduced. The company generally uses these deposits to fund operations and capital expenditures and may not have sufficient resources to repay them if required.
- Personalis relies on a limited number of suppliers, including Illumina as the sole supplier of certain sequencers, reagents, maintenance, and repair services. Supply interruptions or a required technology transition could disrupt operations and affect regulatory documentation.
- The company’s tests are marketed as laboratory-developed tests under the FDA’s enforcement-discretion framework. Changes in FDA, CLIA, state licensing, reimbursement, or other healthcare regulations could increase costs or restrict sales.
- Management reported that material weaknesses in internal control over financial reporting were not fully remediated as of June 30, 2019. Disclosure controls and procedures were therefore deemed ineffective. A new CFO and four accounting personnel were hired, but the remediation controls had not been fully tested.
- The filing reports no material legal proceedings. It identifies broad risks involving profitability, competition, intellectual property, data privacy and cybersecurity, laboratory operations, regulatory compliance, hiring, and future financing.
Investor Verification Items
- Verify the sustainability and timing of VA MVP funding, sample volumes, renewal options, and the concentration of customer deposits.
- Assess whether gross-margin improvement can continue as the company scales and whether operating expenses are growing faster than revenue.
- Review the cash-burn rate, debt terms and floating-rate exposure, required principal payments beginning in 2020, and potential future financing needs.
- Monitor commercialization of ImmunoID NeXT, the liquid biopsy program, and planned diagnostic products, including regulatory and customer adoption milestones.
- Confirm remediation of the material weaknesses and the effectiveness of the company’s accounting and disclosure controls in subsequent filings.
- Evaluate supplier concentration, laboratory capacity, data-security controls, FDA/CLIA developments, and intellectual-property claims or licensing requirements.